Cho High-2017- Daejeon-1502 ( August 28, 2017),

It is illegal that the tax investigation authority has been abused because it does not fall under the reasons for the selection of those subject to tax investigation.

Article 349 of the Civil Procedure Act provides that if a party fails to comply with an order to submit documents, the court may admit that the other party’s assertion regarding documents is true and constitutes a flexible circumstance where the Plaintiff’s assertion is deemed true and correct.

2019Guhap5248 Revocation of Disposition of Corporate Tax Imposition

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○ Head of tax office

June 27, 2019

July 25, 2019

1. The Defendant’s imposition of KRW 103,658,120 (including additional taxes) of corporate tax for the business year 2012 against the Plaintiff on December 4, 2017 and KRW 37,03,320 (including additional taxes) of corporate tax for the business year 2013 shall be revoked.

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

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

(a) The relationship between the parties;

1) 원고(2012. 9. 11. '주식회사 aaa'으로 상호변경등기를 마쳤다)는 2007. 6. 13. ㅇㅇ시 dd길 에서 종이포대 제조업 등을 목적으로 설립된 회사이다.

2) According to the Plaintiff’s certified transcript of corporate register, although the representative director of the Plaintiff was AA at the time of its establishment, the representative director was changed to BB on October 4, 201, and CCC worked as representative director from October 26, 2012 to January 20, 2015, and DDR was serving as representative director from January 20, 2015.

3) The shares issued by the Plaintiff at the time of its establishment are 40,000 shares (one share) and the list of shareholders at the time of its establishment include 26,00 shares (26,00 shares) and EE (26,00 shares) held by CCC each at the time of its establishment.

4) 한편 주식회사 bbb(이하 'bbb'이라 한다)은 포장용 지대(紙袋) 제조업 등을 목적으로 설립된 회사이고, CCC은 2008. 6. 12.부터 2012. 9. 17.까지 bbb의 대표이사로 근무하였다.

B. Circumstances of the instant tax investigation

1) On June 14, 2017, while conducting an integrated investigation of BB, the Tax Investigation Agency notified the Plaintiff identified as a related company of the period of investigation from January 1, 2012 to December 31, 2015 to the effect that “The period of investigation shall be from June 14, 2017 to August 18, 2017, for the taxable period from June 14, 2017, where there is clear evidence to acknowledge a suspicion of omissions or errors in the details of the declaration pursuant to Article 81-6(3)4 of the former Framework Act on National Taxes (amended by Act No. 1520, Dec. 19, 2017; hereinafter “former National Tax Act”).

2) From June 14, 2017 to August 18, 2017, the instant tax investigation agency conducted a corporate integration investigation (hereinafter “instant tax investigation”) for the taxable period from June 14, 2017 to 2015.

3) Around August 2017, the instant tax investigation agency completed the instant tax investigation, it drafted a report on investigation (Evidence 4) to the effect that “The Plaintiff was exposed to KRW 277,700,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000, for employees and employees from 2012 to 2014.

C. Circumstances of the instant disposition

1) On December 4, 2017, the Defendant notified the Plaintiff of the correction of KRW 103,658,120 of corporate tax for the business year 2012 (including additional tax), and KRW 37,03,320 of corporate tax for the business year 2013 (including additional tax) (hereinafter “instant disposition”).

○ Wrongful Calculation Appellant (hereinafter referred to as "grounds for First Disposition")

원고가 특수관계인인 CCC의 아들인 FFF으로부터 ㅇㅇ시 ㅇㅇ동 DD 공장용지 4,221㎡ 및 그 지상건물 1,882.72㎡(이하 '이 사건 각 부동산'이라 한다)를 고가 임차하였으므로, 법인세법 제52조에 따라 적정임차료와 대가의 차액을 각 사업연도 소득금액에 익금 산입함.

○ Amount of transactions of tangible assets (hereinafter referred to as "reasons for 2 disposal")

The Plaintiff’s purchase of bbb, machinery and equipment, and golf membership (hereinafter “the instant tangible assets”) on October 5, 2012 stated in the sales contract that the Plaintiff would pay KRW 250 million in separate cash, in addition to KRW 6.5 million that the Plaintiff reported as purchase price. As such, the transaction value of the instant tangible assets shall be KRW 850 million, deeming the transaction value of the instant tangible assets as KRW 850 million, and the remainder KRW 250 million shall be included in the gross income.

○ Processing Benefit portion (hereinafter referred to as "grounds for Disposition 3")

From 2012 to 2014, the Plaintiff deposited KRW 489,00,00 as a salary to BB, a private partner of CCC, and immediately withdrawn it and deposited it into DD account, and deposited it into CCC and BB again. Of them, the amount deposited to CCC, DD and KRW 16,00,000 and KRW 129,802,650 should be included in the income for each business year and disposed of each income to the person to whom it belongs.

2) The Plaintiff dissatisfied with the instant disposition and filed an administrative appeal with the Tax Tribunal on March 7, 2018, but the Tax Tribunal dismissed the Plaintiff’s claim on November 23, 2018.

2. Determination on the legitimacy of the instant disposition

A. The plaintiff's assertion

1) procedural illegality

A) According to Article 81-6(3)4 of the former Framework Act on National Taxes, the Defendant: (a) deemed that the details of the instant tax return fall under “where there is clear evidence to acknowledge the suspicion of omission or error in the details of the tax return; (b) however, there was no clear evidence to acknowledge the suspicion of omission or error against the Plaintiff at the time the Defendant commenced the instant tax investigation against the Plaintiff; (c) rather, the instant tax investigation office misleads the Plaintiff as the subsidiary owned by GG, the actual private owner of BB, and initiates the instant tax investigation. Accordingly, the instant tax investigation is unlawful as it is illegal that the Plaintiff was selected as the subject of the tax investigation in violation of Article 81-6(3) of the former Framework Act on National Taxes, and thus, the instant disposition is also unlawful.

B) Although Article 81-8(2) of the former Framework Act on National Taxes prescribes the tax investigation period for taxpayers whose annual income or transfer value is less than 10 billion won within 20 days, the instant tax investigation was conducted for a period of 65 days from June 14, 2017 to August 18, 2017. Therefore, the instant disposition based on the instant tax investigation in violation of Article 81-8(2) of the former Framework Act on National Taxes has procedural defects that failed to comply with the said investigation period.

2) Non-existence of grounds for disposition

A) Regarding the ground for the first measure

(1) The FF, a lessor of each of the instant real estate, purchased each of the instant real estate with a loan from the bank. The FF set the amount of the pertinent rent to the extent that the Plaintiff could repay his/her loan and interest on the loan while leasing each of the instant real estate.

As such, the Plaintiff set the rent at an appropriate level by reflecting all the circumstances under the agreement with the FF, a lessor of each real estate of this case, and accordingly, the lease agreement of each real estate of this case does not fall under the object of wrongful calculation under the Corporate Tax Act.

(2) Even if the lease of each of the instant real estate is subject to the avoidance of wrongful calculation, the reasonable rental price should be calculated in accordance with Article 52(2) of the Corporate Tax Act. The pertinent tax investigation agency did not actively investigate the lease cases of the instant real estate similar to the instant real estate. In addition, the Plaintiff and the Defendant did not regard the lease contract with BB as a transaction between the related parties and did not recognize the rental fee as the market price, but the Plaintiff and BB did not have a relation with the related parties.

(3) Furthermore, Article 61(1) of the Inheritance Tax and Gift Tax Act (hereinafter “the Inheritance Tax and Gift Tax Act”) does not apply to the calculation of the rent for each of the instant real estate, but Article 61(5) of the Enforcement Decree of the Corporate Tax Act should be applied pursuant to Article 89(4)1 of the Corporate Tax Act.

B) Regarding the ground for the second measure

The purchase price according to the sales contract of the instant tangible property concluded with BB is only KRW 65 billion as stated in the sales contract. On the contrary, the KRW 200 million as stated in the sales contract is merely based on personal transactional relationship between CCC and BB, and it does not mean that the Plaintiff paid the purchase price in addition to BB as claimed by the Defendant.

C) Regarding the ground for 3 measures

Since BB actually performed its duties as the representative director of the Plaintiff, the benefits of BB are reasonable. Rather, according to the wage calculation method calculated by the Defendant, the monthly salary of BB would be remarkably lower than that of ordinary employees.

B. Relevant statutes

It is as shown in the attached Form.

C. Violation of the disposition of this case (e.g., violation of the Act) - Illegal selection of a person subject to investigation

1) Relevant legal principles

A) Article 81-6(3) of the former Framework Act on National Taxes provides that a tax official may conduct a tax investigation in any of the following cases, other than an investigation by periodic selection (Article 81-6(3) provides that a tax official may conduct a tax investigation in any of the following cases (Article 12(4)). Meanwhile, the principle of due process provided in Article 12(1) of the Constitution does not limit criminal proceedings but apply to all state actions (see, e.g., Constitutional Court en banc Order 92Hun-Ba8, Dec. 24, 1992; Constitutional Court en banc Order 96Hun-Ba4, May 28, 1998; Constitutional Court Decision 96Hun-Ba4, May 28, 199). In order to realize the State’s taxation authority, it is unnecessary to prevent tax evasion and to verify the accuracy of the details of a tax investigation as well as to ensure taxpayers’ sincere tax returns within the scope of tax evasion and to ensure objectivity and objectivity of due process under Article 81 of the former Framework Act.

As can be seen, comprehensively considering the background and purport of Article 81-6 of the former Framework Act on National Taxes regarding the criteria and method of selection of the subject matter of tax investigation, and the relationship between the Framework Act on National Taxes and the individual tax law on Chapter 7-2, including Article 81-6 of the former Framework Act on National Taxes, the right to ask questions and investigate prescribed by the individual tax law shall be allowed only within the scope of the requirements and limit prescribed by Article 81-6 of the former Framework Act on National Taxes after the enactment of Article 81-6 of the former Framework Act on National Taxes. In addition, the act of collecting tax data and imposing tax accordingly, even though there is no ground to select the subject matter of tax investigation as prescribed by Article 81-6 of the former Framework Act on National Taxes, violates Article 81-6 of the former Framework Act on National Taxes, and barring any special circumstance, such taxation disposition is unlawful (see

B) In light of the taxpayer’s property rights or business impact, various side effects that may arise when the tax authority conducts a tax investigation without permission, etc., a tax investigation may commence only when it falls under any of the above grounds prescribed by the Act, and whether it constitutes a ground for commencement of the tax investigation should be strictly interpreted (see Supreme Court Decision 2016Du47659, Dec. 15, 2016); and in principle, the Defendant bears the burden of proving that the tax disposition is lawful, solely on the facts that meet the taxation requirements, such as the tax cause and tax base amount (see Supreme Court Decision 2016Du47659, Dec. 15, 2016). Thus, the Defendant must prove that the tax investigation has commenced lawfully (see Supreme Court Decision 2015Nu57408, Jul. 13, 2016).

C) “Cases where evident material to prove a suspicion of omission or error exists in the content of a declaration” refers to cases where a considerable probability of the omission or error in the content of a declaration is acknowledged based on material supporting objectivity and rationality (see, e.g., Supreme Court Decisions 2008Du10461, Dec. 23, 2010; 2010Du19294, Nov. 29, 2012; 2016Du34387, Jul. 7, 2016).

2) Determination

Based on the above legal principles, considering the following circumstances, Gap evidence 1, Eul evidence 3, Eul evidence 7, Eul evidence 9, Eul evidence 7 through 9, the order of submission of documents to the investigative agency of this court, and the whole purport of oral arguments, the tax investigation of this case is unlawful as it was conducted by abusing the authority to conduct tax investigation even though it does not fall under the grounds for appointment of persons subject to tax investigation under the former Framework Act on National Taxes, and the disposition of this case was made based on the taxation data collected through illegal tax investigation as above, and is in violation of the principle of due process and is unlawful. Accordingly, the disposition of this case must be revoked in an unlawful manner

A) The Defendant: (a) (i) the CCC becomes the representative director of the Plaintiff on or around September 2012, 2012 after the withdrawal of bbb; (ii) the CCC held shares of bbB in the process of holding bB as the representative director of bB; (iii) the Plaintiff’s type of business is the same as b o factory’s type of business; (ii) the CCC did not have any transaction with bbb B before the appointment of the representative director of cCC as the representative director; (iv) the tax invoice issued by bBo factory and the Plaintiff’s IP address issued by bB on or around October 2012; and (iii) the Plaintiff’s assertion that there was no possibility of tax evasion and the Plaintiff’s assertion that there was no clear possibility of tax evasion, even if there was no other evidence to support the aforementioned circumstances or the Plaintiff’s assertion that there was any apparent error in the content of the tax evasion.

(1) Before the instant Tax Investigation Office selects the Plaintiff as an object of tax investigation, it confirmed the Plaintiff’s suspicion of omission or error based on the corporate tax return document, or there is no evidence to deem that there is evident evidence to prove omission or error in the content of the Plaintiff’s corporate tax return itself.

(2) As to an order to submit a document related to the selection review table, analysis report, etc. of the subject of investigation by this court, the pertinent tax investigation agency rejected disclosure on the ground that it constitutes “information deemed to significantly obstruct the fair performance of national tax administration if disclosed,” pursuant to Article 9(1)5 of the Official Information Disclosure Act. Article 349 of the Civil Procedure Act applicable to this case pursuant to Article 8(2) of the Administrative Litigation Act provides that “if a party fails to comply with the order to submit the document, the court may admit the other party’s assertion as to the document true.” This means that the court may recognize the party’s assertion as true when the party fails to comply with the order to submit the document (see Supreme Court Decision 97Da2351, Nov. 13, 1998).

(1) However, the selection review table of the object of tax investigation ordered by this court constitutes an important material to ascertain whether there is a reason to select a person subject to tax investigation under Article 81-6(3) of the former Framework Act on National Taxes, and even if there are no other material to ascertain the existence of a reason to tax investigation under Article 81-6 of the former Framework Act on National Taxes, the instant tax investigation agency failed to submit the selection review table, etc. of the person subject to tax investigation without a detailed explanation as to the above, and ② even if the Defendant’s assertion is based on the Defendant’s assertion, there is no circumstance to find that the selection review table, etc. of the object subject to tax investigation may seriously interfere with the fair national tax administration even if it is disclosed, in view of the fact that there is no objective and apparent material to acknowledge the Plaintiff’s assertion that there was no objective and apparent material to prove the omission at the time of the commencement of the investigation.

(3) The Defendant sent notice of the instant tax investigation to the Plaintiff that EE, BB, DD, CCC, FF, AA, HH, and PP also conducted a gift tax investigation. However, the said EE, etc. stated that “the part concerning the Plaintiff’s consignment of the Plaintiff’s shares, which is the real owner of bbbb due to the reason of the tax investigation, was stated as “the part concerning the Plaintiff’s consignment of the Plaintiff’s shares,” and written the Plaintiff as bB’s related company in the instant tax investigation report (Evidence B No. 4). In addition, the instant tax investigation agency conducted the first investigation with respect to bB and DD on June 26, 2017, immediately after the instant tax investigation commenced, and conducted the first investigation with respect to bB and the Plaintiff on the relationship between bB and the Plaintiff, the Plaintiff’s establishment background, and whether the Plaintiff’s shares were the actual shareholder, and thereafter, conducted the investigation with respect to 2D17 and 2D17.

In other words, despite the fact that GG, the actual representative of BB, owned the Plaintiff (in this case, there are many other matters that submitted the selection review table, etc. of a person subject to investigation by the Defendant on the part of the Defendant), the Defendant determined that the Plaintiff’s shares were trusted in trust to others, and selected the Plaintiff as a person subject to tax investigation. However, following the commencement of the tax investigation, the Defendant conducted an investigation on the financial transaction details of CCC, BB, DD and CCC by expanding the scope of the investigation to prevent the special relationship between BB and the Plaintiff, and conducted an investigation on the reasons for disposition 1, 2, and 3 by examining the financial transaction details of CCC, BB, DD, and CCC. From the commencement of the investigation, it is understood that the Plaintiff

(4) In accordance with the report on the completion of the investigation of this case, even if the part underreporting the transaction amount was found in the sales contract for the tangible assets of this case concluded between the Plaintiff and BB, in light of the aforementioned various circumstances, it is nothing more than the facts revealed by the Defendant’s result of the investigation of this case. In other words, in the instant case where the Defendant bears the burden of proving that the tax investigation was lawfully commenced, it cannot be deemed that there was clear evidence to prove the omission of the sales contract for the tangible assets of this case since the Defendant already selected the Plaintiff as the object of the investigation of this case.

In addition, the report on the closure of the investigation of this case is merely a document prepared after the tax investigation of this case, and thus, it cannot be viewed as an objective document with considerable probability of confirming the omissions or errors of taxes due to its nature.

(5) The Defendant asserts that, based on the disposition of this case, the Gwangju District Court Decision 2017Guhap10678 Decided December 21, 2017, insofar as the selection of a person subject to tax investigation of this case is not illegal, the selection of a person subject to tax investigation of this case is not illegal merely because some suspicions against the Plaintiff was not acknowledged as a result of the instant tax investigation. However, the above Gwangju District Court Decision 2017Guhap10678 decided on the following grounds: (a) the Plaintiff was selected as a person subject to tax investigation in accordance with the determination that there were omissions such as omission of income, omission of park, appropriation of excessive resources such as personnel expenses, shortage of source of asset purchase funds to the Plaintiff; (b) the Plaintiff’s selection from the time of each of the above suspicions, and (c) the list of global income tax and corporate tax reporters submitted at the time of reporting global income tax, total income tax invoices by customer, global income tax return, and value-added tax return, and (d) the existence of the evidence of this case was not found to exist.

3. Conclusion

Thus, since the plaintiff's claim is reasonable, all of them shall be accepted, and it is so ordered as per Disposition.

shall be ruled.