Whether compensation arising from a breach of an obligation arising from a settlement in court constitutes “a penalty or compensation received due to a breach or cancellation of a contract” under Article 21(1)10 of the former Income Tax Act (negative in principle)

In light of the language and purport of Article 21(1)10 and (3) of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same) and the main text of Article 41(7) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010), it is reasonable to deem that the term “contract” or “contract on the right to property” under these provisions refers to only a strict meaning of contract. Thus, reconciliation in a lawsuit cannot be deemed to be included in matters of law, barring special circumstances such as where a contract on property right is established based on a contract on property right. Accordingly, compensation for a violation of an obligation arising only after a compromise in a lawsuit cannot be deemed to constitute “a breach of a contractual obligation and a penalty for breach of a contractual obligation” under Article 21(1)10 of the former Income Tax Act.

Article 21(1)10 and (3) of the former Income Tax Act (Amended by Act No. 9897, Dec. 31, 2009); Article 41(7) of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 22034, Feb. 18, 2010);

[Plaintiff, Appellant] Plaintiff 1 and 1 other (Law Firm Doz., Counsel for plaintiff-appellant)

Plaintiff (Law Firm Han, Attorneys Kim U-young et al., Counsel for plaintiff-appellant)

Head of Suwon Tax Office

Busan High Court Decision 2011Nu2811 decided December 21, 2011

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

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

1. Article 21(1)10 of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same) provides that “the penalty or compensation received due to a breach or termination of a contract” as one of other income. Article 41(7) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010; hereinafter the same) upon delegation from Article 21(3) of the same Act provides that “The term “the penalty or compensation” means the compensation received due to a breach or termination of a contract on property rights, and regardless of the title thereof, refers to the value of the money or other goods to compensate for the damages exceeding the damages to the payment itself which constitutes the original content of the contract.”

In light of the language, purport, etc. of these provisions, it is reasonable to view that the term “contract” or “contract on the right to property”, which is the object of a contract or cancellation, refers to only a strict meaning contract (see Supreme Court Decision 91Nu8180, Jun. 22, 1993). Thus, the settlement in a lawsuit cannot be deemed to be included in the judgment, barring special circumstances, such as that the settlement in a lawsuit is constituted based on a contract on the property right. Therefore, the compensation arising from a breach of the obligation arising only from a settlement in a lawsuit cannot be deemed to constitute “a penalty and compensation received due to a breach or cancellation of a contract” under Article 21(1)10 of the former Income Tax Act in principle.

2. According to the reasoning of the judgment of the court of first instance cited by the court below, ① the non-party 1 and the non-party 2, who were registered in the name of the non-party 1 and the non-party 4, 5, 6, and 7 (hereinafter referred to as "the counter-party 1") were brought an action for ownership transfer registration against the non-party 3 and his children, claiming that the non-party 1 and the non-party 2 were the non-party 1 and the non-party 2 were transferred to the non-party 9 and the non-party 1 and the non-party 2 were transferred to the non-party 9 and the non-party 1 and the non-party 2 were transferred to the non-party 1 and the non-party 9 (the non-party 1 and the non-party 2 were transferred to the non-party 1 and the non-party 2 were transferred to the non-party 1 and the non-party 9 were the non-party 1 and the non-party 2 were disposed of the remainder 1 and the non-party 98.

According to the above facts, the damages for delay in this case is based on the violation of the provisions on the distribution of proceeds from the disposal of the property in this case established in the process of dispute without relation to the violation of the contract on property rights. In accordance with the above legal principles, Article 21 (1) 10 of the former Income Tax Act cannot be deemed as "the penalty and compensation received due to the breach or termination of the contract" as one of other income.

Nevertheless, the lower court determined otherwise by misapprehending the legal doctrine as to other income, such as the scope of “contract” under Article 21(1)10 of the former Income Tax Act or other income, which is the penalty or compensation received due to a breach or termination of a contract, solely on the grounds stated in its reasoning that the settlement in the instant lawsuit constitutes “contract” under Article 21(1)10 of the former Income Tax Act, Article 41(7) of the former Enforcement Decree of the Income Tax Act, or “a contract on property rights” or “a contract on property rights” under Article 21(1)10 of the former Income Tax Act, on the grounds that the settlement in the instant lawsuit constituted an agreement on property rights. Therefore, the lower court erred by misapprehending the legal doctrine as to the scope of “contract” under Article 21(1)10 of the former Income Tax Act or “a penalty or compensation received due to a breach

3. Therefore, without further proceeding to decide on the remaining grounds of appeal, 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 Shin Young-chul (Presiding Justice)