Plaintiff (Attorney Kim Jae-soo, Counsel for the plaintiff-appellant)

Head of Suwon Tax Office

November 3, 2011

1. The Defendant’s disposition rejecting an application for rectification of capital gains tax belonging to the year 2007 against the Plaintiff on January 27, 2010 shall be revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. On May 31, 2004, the Plaintiff purchased a factory site of 8,131.9 square meters (hereinafter “instant land”) from the Korea Land and Housing Corporation in Sung-si, Sung-si, Chungcheongnam-do, and completed the registration of ownership transfer on the Plaintiff’s name on April 20, 207. Meanwhile, the Plaintiff newly constructed a factory building of 2,848.95 square meters in total area on the instant land (hereinafter “instant factory building”) on the ground of the instant land and completed the registration of ownership transfer on March 7, 2007.

B. Thereafter, on April 25, 2007, the Plaintiff entered into a sales contract to sell the instant real estate to Nonparty 2 for KRW 4,175,000,000. On June 8, 2007, the Plaintiff completed the registration of ownership transfer for Nonparty 2.

C. On August 31, 2007, the Plaintiff scheduled the transfer value of the instant real estate at KRW 4,175,00,000, and the acquisition value at KRW 2,916,092,00, and other necessary expenses at KRW 26,000, with the acquisition value at KRW 503,053,00,000, which reverts to the year 2007.

D. After July 8, 2009, the Plaintiff filed a request for correction of reduction, asserting that the portion reported in excess of a reasonable tax amount should be reduced, inasmuch as the Plaintiff had been included in the necessary expenses the settlement cost of Nonparty 3 paid to Nonparty 3 and the settlement cost of KRW 180,00,000 paid to Nonparty 1, and the settlement cost of Nonparty 1 paid to Nonparty 1.

E. On September 7, 2009, the Plaintiff filed an objection against the rejection disposition against the above corrective claim on December 4, 2009, and the Defendant, following a reinvestigation, conducted a re-inspection, conducted a decision of correction to reduce capital gains tax for the year 2007 by KRW 151,087,768 on January 27, 2010 on the ground that “367,000,000, which was paid as settlement expenses to Nonparty 3, was inevitably paid for the purpose of securing the ownership of the instant land, but it is confirmed that Nonparty 1 was paid as settlement expenses, but it is not recognized as necessary expenses on the ground that it was confirmed that it was paid to Nonparty 1 due to a simple loan relationship, and that it was not recognized as a simple loan relationship, only part of the Plaintiff’s corrective claim was accepted, and the Defendant refused to reduce capital gains tax for the year 2007 (hereinafter “instant disposition”).

F. The Plaintiff appealed and filed an appeal with the Tax Tribunal on April 1, 2010, but the appeal was dismissed on March 10, 201.

[Ground of recognition] Facts without dispute, Gap evidence 1, 2, Gap evidence 4-3, Gap evidence 9, 11-3, Gap evidence 1, 2, Eul evidence 1, and the purport of the whole pleadings

2. The assertion and judgment

A. The plaintiff's assertion

Although the Plaintiff intended to purchase the instant land, which is a land for the Korea Land and Housing Corporation, which is a land for the Hanan local industrial complex created in the Korea Land and Housing Corporation, but due to the shortage of funds, the Plaintiff acquired the instant land jointly with Nonparty 1 on May 3, 2004, and registered the transfer of the instant land under its sole name due to the limitation under the relevant Acts and subordinate statutes, and then transferred the instant land to Nonparty 1 by dividing it, and Nonparty 1 transferred the purchase price of KRW 270,000,000 to the Plaintiff. Nonparty 1 received KRW 120,000 from Nonparty 1 as the down payment and the intermediate payment of KRW 120,000,000 from Nonparty 1, and prepared a notarial deed of promissorysory notes equivalent to the amount paid to Nonparty 1 for the settlement of KRW 100,000,000 for the sale of the instant real estate, and the Plaintiff did not recognize the right to the instant land as the sale price of KRW 1000,000,000.

(b) Related statutes;

It is as shown in the attached Form.

(c) Fact of recognition;

1) The Plaintiff borrowed 120,000,000 won out of the instant land to Nonparty 1 on May 3, 2004 when Nonparty 1 entered into a contract with Nonparty 1 to sell 270,000 square meters of the instant land at KRW 270,000 (hereinafter “instant sales contract”), and Nonparty 1 borrowed 120,000,000 from Nonparty 1, without additional interest.

2) Through the instant sales contract with Nonparty 1, the Plaintiff agreed to receive the remainder of KRW 20,000,000 and the intermediate payment of KRW 100,000,000,000 as the above loan, and the remainder of KRW 150,00,000,000, after the Plaintiff transferred the land in its name and divided the land in its name and transferred the ownership to Nonparty 1 in the future. However, the sales contract specified the remainder payment date as May 31, 2004.

In addition, the Plaintiff issued a promissory note with face value of KRW 120,000,000, which was paid to Nonparty 1 as the said down payment and intermediate payment, as of May 31, 2004, and made and issued a authentic deed of promissory notes with the content of recognizing compulsory execution based thereon.

3) Meanwhile, on May 31, 2004, the Plaintiff concluded a sales contract with the Korea Land and Housing Corporation on the instant land and paid the sale price of KRW 120,00,000 in seven times in full, which was paid by Nonparty 1, and completed the registration of ownership transfer under the Plaintiff’s name on the instant land on April 20, 207. The Plaintiff completed the registration of ownership transfer on the instant factory building newly built on the instant land under the Plaintiff’s name on March 7, 2007.

4) However, while the Plaintiff completed the registration of ownership transfer as above with respect to the instant land, the obligation to transfer ownership under the instant sales contract was not fulfilled, and Nonparty 2 immediately filed a registration of ownership transfer claim based on the pre-sale agreement as of March 20, 2007 with the Plaintiff, and Nonparty 1 received a decision of compulsory commencement of sale of the instant real estate on May 11, 2007, based on the notarial deed of the said promissory note as above.

5) Upon consultation with Nonparty 1 on June 8, 2007, the Plaintiff paid KRW 300,000,000,000, plus KRW 180,000,000, which was paid as the down payment and intermediate payment of the instant sales contract, to Nonparty 1, and in return, Nonparty 1 gave up all the rights under the instant sales contract and withdraw the said application for compulsory auction (hereinafter “instant agreement”), and accordingly, paid KRW 300,00,000 to Nonparty 1 on the same day.

[Ground of recognition] Facts without dispute, Gap evidence 3, Gap evidence 4-1 through 3, Gap evidence 6-8, Gap evidence 9-1, 2, and Gap evidence 12, the witness non-party 4 and non-party 1's testimony and the purport of whole pleadings

D. Determination

1) According to Article 97(1) of the former Income Tax Act (amended by Act No. 10408, Dec. 27, 2010) and Article 163(3) of the Enforcement Decree of the same Act, “where a lawsuit is instituted after the acquisition of the transferred asset, the amount obtained by subtracting the cost of lawsuit, reconciliation cost, etc. directly required to secure the ownership, which is included in necessary expenses from the calculation of each income amount of the year the payment was made, shall be deducted from the capital expenditure among necessary expenses when calculating gains on transfer.”

2) The following circumstances revealed by the above recognition: (a) the Plaintiff entered into the instant sales contract with Nonparty 1 to sell part of the instant land prior to the sales contract to acquire the land due to insufficient funds to purchase the instant land; (b) KRW 120,00,000, which was received as the down payment and intermediate payment, was actually used for the payment of the price for the instant sales contract; (c) on the other hand, Nonparty 1’s receipt of the said promissory notes from the Plaintiff for the performance of the obligation to transfer ownership under the instant sales contract and the compensation for damages in the event of nonperformance of such obligation; (d) although the Plaintiff failed to perform the above obligation to transfer ownership, Nonparty 1 asserted 1’s right based on the instant sales contract upon the said promissory notes, upon receiving the order to commence compulsory execution for the instant real estate based on the instant sales contract; (c) as such, the disputes arising from the execution of the instant sales contract between the Plaintiff and Nonparty 1 arose in the legal form of compulsory execution for the instant real estate; (d) Nonparty 1 paid 00000 won for settlement of the instant real estate ownership and payment to Nonparty 10000.

3) Therefore, in calculating the transfer income tax on the Plaintiff for the year 2007, the Defendant’s disposition of the instant case was unlawful since it did not recognize it as necessary expenses and did not recognize it as the capital expenditure on the instant real estate and deducted it from the transfer value, and thus, the instant disposition was unlawful.

3. Conclusion

Therefore, the plaintiff's claim of this case is reasonable, and it is so decided as per Disposition.

[Attachment Form 5]

Judge Cho Man-tae (Presiding Judge)