Seoul High Court-2017-Nu-7645 ( dated 27, 2017)

Time of inclusion of bad debts in deductible expenses;

In filing a claim for correction of the period of non-deductible loss, the burden of proving the "completion of extinctive prescription" under Article 62 (1) 1 of the Enforcement Decree of the Corporate Tax Act cannot be deemed to have fulfilled the burden of proving the plaintiff

Article 34 of the Corporate Tax Act and Article 62 of the Enforcement Decree thereof

2017du53781 Disposition of revocation of revocation of corporate tax rectification

AA Bank, Inc.

BB Director of the Tax Office

Seoul High Court Decision 2016Nu77645 Decided June 27, 2017

October 25, 2018

The appeal is dismissed.

The costs of appeal are assessed against the Plaintiff.

The grounds of appeal are examined.

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

A. AAA Card Co., Ltd. established AA card system, AA card system, AA card system, AA card system, and AA card system, a limited liability company (hereinafter referred to as 16th limited liability company, and 17th limited liability company in turn, and hereinafter referred to as 'the instant limited liability company') around 203, and sold claims against the instant limited liability company.

B. At each time of sale, the Plaintiff agreed to grant credit to the securitization bonds issued by the instant limited company based on the underlying asset of the instant credit card bonds.

C. The Plaintiff, which merged AAA card company, received credit card claims from the instant limited liability company from October 2003 to March 2004, and paid money to the instant limited liability company (hereinafter referred to as “credit card claims transferred to the Plaintiff”) (the “the instant credit card claims”, and the said money paid by the Plaintiff was referred to as “the instant money”).

D. Since then, the Plaintiff purchased several credit card bonds from the instant limited liability company and lent money to the instant limited liability company.

E. In 2003 and 2004, the Plaintiff obtained approval from the Governor of the Financial Supervisory Service for a bad debt on the instant credit card claim, but did not include the instant money in deductible expenses but did not adjust it as non-deductible expenses.

F. The Plaintiff filed a request for correction of corporate tax reduction for each business year of 2007 or 2009 on the grounds that the instant money was included in deductible expenses, but the Defendant rejected the said request for correction.

2. Regarding ground of appeal No. 1

A. The lower court, citing the reasoning of the judgment of the first instance, determined that the instant money was the sales price paid by the Plaintiff in return for the purchase of the instant credit card bonds from the instant limited liability company in light of the following circumstances.

1) According to a credit extension agreement concluded by the Plaintiff, in the event that the instant limited company is insufficient to repay the principal and interest of the securitization bonds issued on the basis of the securitization assets acquired from the Plaintiff, the said limited company provided loans to the Plaintiff within the extent prescribed by the said agreement in order to grant credit to the insufficient amount. Since the Plaintiff was obligated to lend funds to the instant limited company under such credit extension agreement, there is no special circumstance for the instant limited company to borrow the instant funds, separate from the credit extension agreement from the Plaintiff.

2) According to the above credit extension agreement, the Plaintiff did not possess the assets of the instant limited liability company for the purpose of securing the entire amount of securitization bonds, or collect or dispose of them to satisfy the claims. If the Plaintiff lends the instant money to the instant limited liability company and holds credit card bonds for the purpose of securing the claim, as alleged by the Plaintiff, it would be contrary to the above agreement.

3) The Plaintiff’s report on the tax base and tax amount of corporate tax is an item of “SPC redemption loss” and an amount consistent with the instant money is appropriated as a tax adjustment reserve item. In light of the fact that the name of the item is “redemption loss”, it is difficult to view it as a loan of the nature of the instant money.

B. Furthermore, the court below rejected the plaintiff's assertion that "the part exceeding the market price of the credit card bonds of this case out of all or the funds of this case constitutes loans to the limited company of this case, and the limited company of this case should include all or part of the funds of this case as bad debt in deductible expenses in the year of 2007 to 2008, since there were bad debt grounds for the right to claim the return of loan of this case at the time of

C. Examining the relevant legal principles and records, the lower court did not err in its judgment by failing to exhaust all necessary deliberations as alleged in the grounds of appeal, thereby exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, or by misapprehending the legal doctrine on the nature of the instant money.

3. Regarding ground of appeal No. 2

A. In an administrative litigation seeking revocation of a taxation disposition on the ground of its illegality, in principle, the tax authority bears the burden of proving the legality of the taxation disposition and the existence of the taxation requirements. Therefore, in principle, the tax authority bears the burden of proving necessary expenses or deductible expenses, which are the basis of the determination of taxable income. However, given that matters concerning necessary expenses or deductible expenses are generally favorable to the taxpayer, and most of the facts constituting the basis thereof are difficult for the tax authority to prove in the controlled area of the taxpayer, it is reasonable to have the taxpayer prove the burden of proof by taking into account the difficulty of proof or equity between the parties concerned (see, e.g., Supreme Court Decision 2010Du4599, Oct. 31, 2013).

B. Examining the records in accordance with such legal principles, the court below rejected the Plaintiff’s assertion that “the claim transferred from the 16th limited company of the instant credit card bonds from the 16th limited company has been completed in 2008, based on the results of examination of evidence, such as the result of reply to the order to submit financial transaction information, and thus, the extinctive prescription has been completed in the business year 2008, the amount paid to the 16th limited company of the instant funds should be included in deductible expenses in the business year of 2008.” In so doing, contrary to what is alleged in

4. Regarding ground of appeal No. 3

The lower court, based on its stated reasoning, did not accept the Plaintiff’s assertion that “the amount equivalent to the book value of the above sales claim should be included in the deductible expenses for the business year 2009,” on the grounds that the Plaintiff’s sales claim in the business year 2009 cannot be deemed as part of the instant credit card claim.

Examining the relevant legal principles and records, the lower court did not err by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, contrary to what is alleged in the grounds of appeal.

5. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.