In cases where it is clearly revealed that non-profit domestic corporations cannot spend reserve funds for proper purpose business for five years for proper purpose business purposes other than proper purpose business purposes during the five-year grace period, whether such funds can be immediately included in the gross income of the business year in which the cause for use occurred notwithstanding the five-year grace period under Article 29(3)4 of the former Corporate Tax Act (affirmative)

Article 29(1) and (3) Subparag. 4 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) provides that, instead of allowing non-profit domestic corporations to include the portion appropriated as the reserve for the proper purpose business in deductible expenses even before they spend the reserve for the proper purpose business, it is intended to ensure that non-profit domestic corporations can carry out public projects smoothly by deferred taxation for the above period on the premise that the reserve for the proper purpose business should be spent for the proper purpose business until the fifth anniversary of the end of the business year after which the reserve for the proper purpose business is appropriated as deductible expenses, instead of allowing the non-profit domestic corporations to include the portion appropriated as the reserve for the proper purpose business in deductible expenses. Therefore, if a non-profit domestic corporation has become unable to use the reserve for the proper purpose business for the five-year grace period for the proper purpose business, it may promptly include the amount used in the gross income for the business year in which the reason for

Article 29(1) and (3)4 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010; see current Article 29(4)4)

School Juristic Person (Law Firm Pyeongan, Attorneys Ahn Dai-hee et al., Counsel for the plaintiff-appellant)

Head of Ansan Tax Office

Seoul High Court Decision 2016Nu35924 decided October 5, 2016

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 29(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) provides that where a non-profit domestic corporation appropriates reserve funds for proper purpose business to be used for the proper purpose business of the corporation as deductible expenses in each fiscal year, it shall be included in deductible expenses within a certain limit, and Article 29(3)4 provides that where the reserve funds for proper purpose business of the corporation are not used for proper purpose business by the date on which five years pass from the end of the fiscal year in which the reserve funds for proper purpose business are appropriated as deductible expenses, the balance shall

The above provisions aim to enable non-profit domestic corporations to smoothly carry out public services by deferred taxation on the premise that reserves for proper purpose business should be spent for proper purpose business in lieu of allowing non-profit domestic corporations to include the reserves for proper purpose business in deductible expenses in deductible expenses even before they are expended for proper purpose business, etc., for the five years after the end of the business year in which reserves for proper purpose business are appropriated for deductible expenses. Therefore, in cases where a non-profit domestic corporation has lost the premise that reserves for proper purpose business cannot be spent for proper purpose business any longer during the five-year grace period by using reserves for proper purpose business for other purpose than the proper purpose business, etc., it shall be reasonable to view that the amount equivalent to the amount used can be promptly included in the gross income of the business year in which the cause occurred, notwithstanding the five-

2. Review of the reasoning of the lower judgment and the record reveals the following facts.

A. The Plaintiff was a non-profit domestic corporation established for the purpose of providing specialized education on secondary education and unemployment around March 1962. At the time of its establishment, the Plaintiff owned the instant land as its fundamental property after receiving a contribution from the time of its establishment, and sold 1,632,03,000 won to the 1,632,03,000 won (hereinafter “sale proceeds of the instant land”).

B. The Plaintiff included KRW 1,689,657,481, including the proceeds from the sale of the instant land, as its reserve funds for proper purpose business, and completed a corporate tax return for the business year 2005.

C. After that, the Plaintiff deposited and managed the proceeds from the sale of the instant land as fixed deposit, and acquired the instant apartment in KRW 1,676,901,250 for rental business from November 19, 2007 to December 28, 2007 with the permission of the competent office of education, and did not spend the amount equivalent to the above amount for the proper purpose business even after the lapse of the five-year grace period.

3. Examining these facts in light of the aforementioned provisions and legal principles, so long as the Plaintiff purchased the instant apartment from the sale price of the instant land and used it for rental business other than the proper purpose business, it is clear that the sale price of the instant land cannot be spent for the proper purpose business, so it shall be deemed that it can be included in the gross income for the business year 2007 where the cause occurred.

Nevertheless, solely on the grounds stated in its reasoning, the lower court determined that the sales price of the instant land did not reach five years from the end of the business year in which the sales price was yet appropriated as deductible expenses even if the Plaintiff used the instant land for rental business, other than the proper purpose business, and thus, the sales price of the instant land cannot be included in the gross income for the business year in which the purchase date of the instant apartment belongs. In so doing, the lower court erred by misapprehending the legal doctrine as to the period

4. Therefore, 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 Kim Shin (Presiding Justice)