Bosch Rexning Co., Ltd. (Law Firm Daoon, Attorneys Seo-ho et al., Counsel for the defendant-appellant)

head of Sung Dong Tax Office

March 21, 2012

Seoul Administrative Court Decision 2011Guhap7472 decided September 2, 2011

1. Revocation of a judgment of the first instance;

2. The defendant's rejection disposition of corporate tax on May 8, 2009 (192,940,330 won in the business year 2006, 382,235,960 won in the business year 2007) and the disposition of imposition of corporate tax on September 1, 2009 shall be revoked in all the disposition of imposition of corporate tax of KRW 484,107,210 in the business year 2006, and KRW 754,849,510 in the business year 2007.

3. All costs of the lawsuit shall be borne by the defendant.

The same shall apply to the order.

1. The part citing the judgment of the court of first instance

The reasoning for the use of the instant case is as follows: (a) whether the instant disposition was lawful; (b) whether the instant disposition is legitimate; (c) the relevant statutes (from the second to the fourth to the fourth seventh); (d) “The third correction request (hereinafter “third correction request”) was made”; and (e) the relevant statutes that the fourth to the seventh is changed into the “related statutes” at the end of the judgment, as follows; and (e) the grounds for the first instance judgment, except for the amendment of the relevant statutes that the fourth to the seventh to the “related statutes” at the end of the judgment. In accordance with Article 8(2) of the Administrative Litigation Act and the main text of Article 420 of the Civil Procedure Act.

“The third request for correction(hereinafter referred to as “the third request for correction”) was made. The details thereof are as follows:

The tax amount for the claim for refund of the purchase price or sale price reduction for the business year included in the main sentence (unit: the original unit) shall be 10,993,586,824, 824, 825, 396, 618, 192, 940, 330710,947, 970, 974, 9546, 399, 629, 015382,235,960

2. Part to be used again; and

C. Determination

According to Article 45-2 (2) 5 of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010; hereinafter the same) and Article 25-2 (2) 2 of the Enforcement Decree of the Framework Act on National Taxes, where a contract related to the validity of a transaction, act, etc., which served as the basis of calculating the tax base and the amount of tax, is cancelled by the exercise of the right of rescission or is cancelled or cancelled due to unavoidable reasons that occur after the formation of the relevant contract.

Even if the corporate tax was reported prior to the cancellation of apartment sale contract, as long as the sales contract becomes retroactively invalidated due to the retroactive effect of cancellation, the taxable income subject to corporate tax is nonexistent from the beginning (see Supreme Court Decision 2001Du5989 delivered on September 27, 2002).

After the Plaintiff filed corporate tax for the business year 2006 and the business year 2007, the sales contract for the 29 households and the 15 rooms of the instant apartment was rescinded three times from July 1, 2008 to March 31, 2009 due to the circumstances that the buyer did not fulfill the conditions of the sales contract. The Defendant is correct to correct corporate tax by deducting the sales price released from the initial reported sales price according to the Plaintiff’s request for correction. The Defendant’s acceptance of the first and second request for correction and the second request for correction and the decision to refund corporate tax amount of KRW 484,107,210, 2007 to the Plaintiff, 754,849,510 of corporate tax for the business year 2007 and the rejection disposition of the instant case that rejected the third request for correction is unlawful.

According to Article 40 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same), which provides for the principle of confirmation of rights and obligations, and Article 69 (2) of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010), the amount of revenue and the difference arising from the cancellation of a sales contract shall be included in gross income or deductible expenses for the business year in which the date of cancellation falls.

The principle of confirmation of rights and duties, which is the principle of determining the period of attribution of income, refers to a method of calculating income for the pertinent year, deeming that a right that is not the time when income is realized if there is an hourly gap between the time when income is determined and the time when income is realized (see Supreme Court Decision 91Nu8180, Jun. 22, 1993). When a sales contract is cancelled, it is retroactive to the time of conclusion of the sales contract, and it does not occur even if there is no right from the beginning. The principle of confirmation of rights and duties refers to whether the income is attributed to any business year on the premise that the gains accrue. Since a claim for correction of the income that is to accrue in a business year does not exist as the retroactive effect of cancellation, it is different from the amount of tax for the pertinent business year by excluding non-existent income and revising

The defendant asserts that according to Article 20 of the former Framework Act on National Taxes and Article 43 of the former Corporate Tax Act, when investigating and determining the national tax base, it shall comply with general corporate accounting standards or practices recognized as fair and reasonable. According to corporate accounting standards, any changes following the cancellation of a contract are dealt with as a prior accounting method. Thus, even if the amount of revenue is changed due to the cancellation of a contract, it shall be reflected in the profit

There is no evidence that there is corporate accounting standards or practices that require the accounting of changes in the amount of revenue arising from contract rescission as a prior law (Article 12 of the corporate accounting standards) (Article 34 of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 0187, Feb. 28, 2011). Under Article 34 of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 0187, Feb. 28, 2011), the gross income shall be calculated by the “contract Amount X Work Progress rate - the amount included in gross income by the end of the immediately preceding business year,” and the “total construction cost/total estimated cost” calculated by the end of the relevant business year and the “work progress rate” calculated by the said “work progress rate” and not the estimated amount. In this context, where gross expenses and losses (total expenses incurred in the relevant business year are changed due to the cancellation of a contract, not only changes in the estimated amount but also changes in the accounts).

3. Conclusion

The decision of the first instance is revoked. The defendant's application for the correction of corporate tax (192,940,330 won in the business year 2006, 382,235,960 won in the business year 2007, and 484,107,210 won in the business year 2006, and 754,849,510 won in the business year 2007, and 754,849,510 won in the business year 2007, respectively, shall be revoked.

[Attachment Form 5]

Judges Kim Jong-dae (Presiding Judge)

1) It shall reflect the effects of the change of accounts only in the period of accounts after the change of accounts, in a manner that does not meet any number of financial statements reported prior to the change of accounts and that does not calculate the cumulative effects of the change of accounts.

2) To change the basis, method, etc. for accounting estimates that have been used until now according to the change in the corporate environment, the acquisition of new information, or the accumulation of experience.

3) Finding any accounting error contained in the previous financial statements and modifying such error.