In a case where eight co-owners, including Gap, agreed that Gap and four co-owners shall complete the aggregate building of business facilities by delegation of all authority to the other co-owners on the land owned by Gap and complete the aggregate building of business facilities, and the other co-owners shall pay 30% of the development gains they acquired according to their shares, as compensation for contribution in the course of distributing development gains, and in a lawsuit claiming division of the above building, Gap was sentenced to divide the building in kind. On the other hand, Gap was paid part of the compensation for contribution under the above agreement, and the head of the competent tax office deducted the above compensation from necessary expenses from the compensation for contribution as a reward under Article 21 (1) 17 of the Income Tax Act, and revised and notified the comprehensive income tax to Gap, the above compensation for contribution should be classified as compensation for service as prescribed in Article 21 (1) 17 of the Income Tax Act, on the ground that it is reasonable to view that the compensation for contribution not only has the nature of the compensation for the provision of services, but also has the nature of honorarium for the entire service.

After Gap and four co-owners completed the aggregate building of business facilities by delegation of all authority to the other co-owners on the land owned by eight co-owners including Gap, and completed the aggregate building of business facilities, the agreement was reached between Gap and four co-owners that "the 30% of the development gains they acquired by shares shall be paid as compensation for meritorious services in the course of distributing development gains (hereinafter "the above agreement"), and the decision was made to divide the building in kind in a lawsuit claiming a partition of the above building, while the head of the competent tax office received part of the compensation for meritorious services under the above agreement, and the head of the competent tax office deducted the necessary expenses from the compensation for meritorious services, and then corrected and notified the comprehensive income tax to Gap.

The case holding that the above agreement basically takes the character of a sort of successful compensation agreement according to the results of the construction development project related to the above land, rather than the payment agreement for the entrusted affairs performed by Gap according to the delegation contract, and that the delegation contract does not specify the amount to be paid by Gap as the price for the entrusted affairs, and it does not specify the contents of Gap's specific provision of services on behalf of the whole co-owners, and that Gap's specific provision of services does not constitute "temporary provision of personal services" under Article 21 (1) 19 of the Income Tax Act because the provision of services such as entering into various contracts for the construction of a new building on behalf of the whole co-owners and appointment of an attorney in the legal dispute process related to the provision of services takes place over a long period of time, and if the price for the entrusted affairs is the price for the entrusted affairs, the person liable to pay compensation for services is only four of the whole co-owners, and since the amount of compensation for services is more than the objective value of the services provided by Gap, it is reasonable to classify Gap's aforementioned compensation as the above provision of services under Article 17 (1).

Article 21 (1) 17, 19 of the Income Tax Act

Plaintiff (Attorney Kim Hyun-hwan, Counsel for the plaintiff-appellant)

Head of Seodaemun Tax Office

May 15, 2020

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of imposing global income tax of KRW 1,424,070,080 (including additional tax) for the Plaintiff on April 4, 2018 shall be revoked.

1. Details of the disposition;

A. The Plaintiff’s receipt of compensation for meritorious services

1) The land (location omitted) in Yeongdeungpo-gu Seoul (hereinafter “instant land”) was originally owned by Nonparty 1. Nonparty 1 died on or around December 1984, and the inheritor succeeded to the land and subsequently completed the process of inheritance, transfer, etc. of each heir’s shares after inheritance, and subsequently, on or around February 1993, all eight co-owners including the Plaintiff (hereinafter “all co-owners”) owned the instant land according to their respective shares, as indicated below [Attachment].

Nonparty 24/294 Nonparty 384/294 Nonparty 416/294 Plaintiff 7/294 Nonparty 516/294 Nonparty 67/294 Nonparty 756/294 Nonparty 756/294 Nonparty 84/294 of the shares of the voting co-owners located in the main sentence.

2) Since around 1992, all co-owners, including the Plaintiff, decided to construct a new business facility building on the instant land, and completed the △△△△△△ Condominium, a business facility of the 8th basements and the 12th floor above the ground on October 21, 2005. A part of the above aggregate building was disposed of to cover construction costs around that time (hereinafter “instant building”).

3) On February 6, 2007, Nonparty 3, Nonparty 2, Nonparty 4, and Nonparty 5 (hereinafter “fourth co-owners”) residing in Japan among the entire co-owners agreed with the Plaintiff on February 6, 2007 that “4 co-owners shall pay 30% of the development gains they acquired by themselves for each share (the profits between the market price of the building in this case and the market price of the land in this case) to the Plaintiff as compensation for contribution when distributing the development gains (hereinafter “instant agreement”). The main contents of the agreement prepared at that time (hereinafter “instant agreement”) are as follows:

Article 1 of the Agreement contained in the main text of this case was in charge of the construction, sale in lots, etc. of the building of this case by the plaintiff, who is the co-owner of this case in Korea, but it was not clear about the detailed explanation to the co-owner of Japan (referring to four co-owners; hereinafter the same shall apply). Thus, in the future, the plaintiff's explanation after the construction, sale in lots, and operation of the building of this case shall be made to the co-owner of Japan more detailed in advance and later. The final profit from the construction, sale in lots, and operation of the building of this case shall be distributed according to the co-ownership, but the plaintiff may be paid from the revenue accrued from the building of this case, actual cost, and actual cost. However, in case where the co-owner of Japan gains profit from the construction of the building of this case, Japan's co-owner shall pay 30% of the actual profit derived from the construction of the building of this case to the plaintiff (it shall be dealt with at the time).

4) Co-owners 4 and Nonparty 7 filed a lawsuit against the Plaintiff, Nonparty 6, and Nonparty 8 seeking the division of the instant building, which is jointly owned by the Seoul Southern District Court 2008Gahap248777 (hereinafter “related lawsuit”). Accordingly, the Plaintiff filed a lawsuit claiming the payment of each of the total amount of KRW 1,363,631,252 won from the appellate court (Seoul High Court 2010Na21209) to Nonparty 7 and four co-owners, as Seoul High Court 2010Na51224 (Seoul High Court 2010Na51224) (hereinafter “related lawsuit”).

5) On November 16, 2012, the appellate court rendered a judgment dividing the instant building in kind on the premise that all co-owners share share share with respect to the claim filed by Nonparty 7 and four co-owners. On the Plaintiff’s counterclaim, the appellate court rendered a judgment ordering the Plaintiff to pay 2,864,28,145 won, and Nonparty 3 paid 4,296,342,218 won, and damages for delay on the part of the Plaintiff’s claim for the payment of compensation under the instant agreement,

6) The Plaintiff received KRW 3,115,543,401 (including delay damages; hereinafter “instant meritorious compensation”) from Nonparty 2, Nonparty 4, and Nonparty 5, and did not receive any payment from Nonparty 7 and Nonparty 3, among the compensation for meritorious services to be paid in accordance with the judgment of the appellate court in the relevant lawsuit in 2013.

B. The defendant's taxation disposition contents

1) The director of the Seoul Regional Tax Office, from December 29, 2015 to February 5, 2016, conducted a tax investigation with respect to the Plaintiff (tax item subject to investigation: global income tax, investigation period: 2013 and 2014; hereinafter “tax investigation of this case”), confirmed that the Plaintiff was not reported as the amount of income after receiving the instant monetary compensation, and notified the Defendant of the measures of taxation on the instant monetary compensation by deeming the instant monetary compensation as the honorarium under Article 21(1)17 of the Income Tax Act and the measures of post management on the unpaid monetary compensation.

2) Accordingly, the Defendant deducted totaling KRW 625,880,350, including necessary expenses, such as the costs of lawsuit claimed by the Plaintiff from the compensation for meritorious services in the instant case, and subsequently notified the Plaintiff on April 4, 2018 of the total income tax accrued in the year 2013 as KRW 1,424,070,080 (including additional taxes) (hereinafter “instant disposition”).

3) The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on July 2, 2018, but the Tax Tribunal dismissed the appeal on November 16, 2018.

[Reasons for Recognition] Unsatisfy, Gap evidence 2 through 5 (including branch numbers, hereinafter the same shall apply), Eul evidence 1 to 3, the purport of the whole pleadings

2. Relevant statutes;

It is as shown in the attached Form.

3. Whether the instant disposition is lawful

A. Note 4) Summary of Plaintiff’s assertion

On September 2002, the Plaintiff entered into a contract with the remaining co-owners of the instant land to perform the construction and sale of the instant building as delegated by the Plaintiff, and thereafter, provided various services under the said contract.

Therefore, 80% of the necessary expenses should be deducted pursuant to Article 21(2) of the Income Tax Act and Article 87 subparag. 1(b) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 28637, Feb. 13, 2018; hereinafter the same) in consideration of the provision of temporary personal services under Article 21(1)19 of the Income Tax Act.

Nevertheless, the Defendant deemed the instant contribution compensation as an honorarium pursuant to Article 21(1)17 of the Income Tax Act and recognized only the expenses actually incurred by the Plaintiff as necessary expenses. Accordingly, the instant disposition made on the same premise should be revoked as unlawful.

B. Facts of recognition

The following facts are acknowledged by the parties to a dispute, or by the purport of Gap evidence Nos. 1 through 3, 6 through 27, and Eul evidence No. 3 and all pleadings.

1) The developments leading up to the construction of the instant building

A) In around 1994, all co-owners entered into a contract with the two mountain Construction Co., Ltd. (hereinafter “Co., Ltd.”) to construct a building on the instant land, but only some construction works were suspended.

B) On September 2002, all co-owners prepared and rendered a power of delegation to the Plaintiff, stating that “In constructing a new building on the eight and the twelveth floor above the instant land, and using, earning profit from, and disposing of such land and building, all the powers pertaining thereto shall be delegated to the Plaintiff, and the Plaintiff shall be appointed as the prop and the owner’s representative” (hereinafter “instant delegation contract”).

C) On September 30, 2002, the Plaintiff entered into a contract for the building construction industry and building construction as an agent of the remaining co-owners, among all co-owners, and the building of this case was completed on October 21, 2005.

D) From February 15, 1995, the entire co-owners operated a joint business entity with the trade name of the instant land as its place of business (hereinafter “instant business entity”). At the time when the Plaintiff was appointed as the representative of the said company, the Plaintiff was issued a tax invoice under the name of the instant business entity from the said construction company, etc. at the time of the construction of the instant building. After the construction of the instant building, the Plaintiff also performed the business related to the sale and lease of the instant building through the instant business entity.

2) Circumstances in which the relevant lawsuit was brought

A) On February 207, 2007, four co-owners residing in Japan brought an issue to the Plaintiff that the Plaintiff did not properly handle the delegated affairs under the instant delegation contract, and the instant agreement was drafted with the Plaintiff promised to smoothly perform the delegated affairs in the future.

B) On December 11, 2008, four co-owners and the non-party 7 filed a lawsuit related to the instant delegation agreement, deeming that the Plaintiff still did not properly handle the delegated affairs under the instant delegation agreement. The first application for mediation was filed to the effect that “the non-party 2 in the management of the instant building is selected as the representative for the entire co-owners,” but the amendment was made to the purport that “after which the instant building is divided according to co-ownership.”

3) Other circumstances

A) From 192, the Plaintiff concluded various services contracts, such as traffic impact assessment, geological survey, and supervision necessary for the construction of the instant building, under the name of the Plaintiff on behalf of all co-owners.

B) The Plaintiff was 76 years of age (date of birth omitted) at the time of entering into the instant delegation agreement, and did not have a professional certificate related to the construction of real estate and the sale and lease of real estate until now.

C) In the year 198 and 2006, legal disputes arose between all co-owners on the payment of construction cost between each of the construction enterprises listed in Paragraph 1 above. At that time, the Plaintiff appointed an attorney-at-law on behalf of all the co-owners and proceeded with the lawsuit.

C. Determination

1) In full view of the contents, language, and system of Article 21(1)17, 19, and (2) of the Income Tax Act, and Article 37(2) of the former Enforcement Decree of the Income Tax Act, other income under each item of Article 21(1)19 of the Income Tax Act must be either the “price for the provision of personal services” or the “price for the provision of personal services.” Thus, even if income is acquired in relation to the provision of services, it shall not be deemed income under subparagraph 19 if it exceeds the nature of the consideration for the provision of services. The above provision of subparagraph 19 of the Income Tax Act excludes the consideration for the provision of services subject to subparagraph 17 of the same Article. While income under subparagraph 19 of the same Article can be included at least 80/10 in the calculation of necessary expenses at a fixed rate, it is reasonable to comprehensively consider the purport that the amount of remuneration for the provision of services can be included in the scope of 17/100 as remuneration for the provision of services (see Article 17(2).7).7).

Meanwhile, Article 21(1)17 of the Income Tax Act provides as one of the other income, “compensation” refers to money and valuables provided as a means of a case in connection with administrative affairs or provision of services, etc., and whether it constitutes such money and valuables ought to be determined by comprehensively taking into account the motive and purpose of receiving the money and valuables, relationship with the other party, amount, etc. (see Supreme Court Decision 2010Du27288, Sept. 13, 2013, etc.).

2) Examining the facts acknowledged earlier in light of the aforementioned relevant legal principles, it is reasonable to view that the instant compensation for meritorious services has not only the nature of remuneration, such as remuneration for the provision of services, but also the nature of honorariums as a whole exceeds the scope of compensation for services as a whole. As such, the instant compensation for meritorious services ought to be classified as a honorarium under Article 21(1)17 of the Income Tax Act. Therefore, the instant disposition is lawful, and the Plaintiff’s assertion on a different premise is without merit.

A) From the year 192, the Plaintiff is responsible for various authorization and permission, construction management, and supervision related to the development of the instant land, and after the construction of the instant building, it appears that it has made considerable efforts to ensure the success of the said development project while performing various duties of sale and lease through the instant enterprise. Accordingly, it is determined that four co-owners, among all co-owners, agree to pay 30% of the development gains he/she acquired by shares, out of the development gains he/she acquired by recognizing the Plaintiff’s above contribution.

In other words, the instant agreement is basically not a payment agreement for the management of delegated affairs performed by the Plaintiff according to the instant delegation agreement, but a kind of successful compensation agreement according to the outcome of the instant land-related construction development project.

B) The Plaintiff repeatedly asserts that the instant contribution compensation is the price for the management of delegated affairs. However, even if examining the content of the instant delegation agreement, the amount that the Plaintiff is obligated to receive in return for the management of delegated affairs is not specified.

In addition, the delegation contract of this case grants the Plaintiff the authority to conduct administrative affairs as the representative of the entire co-owners, with well-known the overall flow or situation related to the construction of the building of this case. It does not seem that the delegation contract of this case itself does not specify the contents of the Plaintiff’s specific provision of services.

Furthermore, even if examining specific delegated affairs, the Plaintiff entered into various contracts for the construction of the instant building on behalf of all co-owners, or served as an attorney-at-law in the process of relevant legal disputes. This is not only an Plaintiff’s provision of professional knowledge or experience in the process of building the instant building for a long period, but also it is difficult to view that the provision of such services falls under the “temporary provision of personal services” under Article 21(1)19 of the Income Tax Act.

Above all, if we look at as alleged by the Plaintiff, the entire co-owners should pay the Plaintiff the compensation for contribution under the instant agreement, but as seen earlier, the obligor is only four co-owners among the entire co-owners.

C) The Plaintiff’s final contribution compensation that was paid by the four co-owners and the non-party 7 reaches the amount of KRW 8 billion per principal (see, e.g., evidence A) and exceeds KRW 3.1 billion per se.

However, considering that the Plaintiff has been performing various duties on behalf of all co-owners since 1992, the amount of compensation for meritorious services is large enough to exceed the objective value of services provided by the Plaintiff. Therefore, even if the compensation for meritorious services in this case includes some of the costs of services provided by the Plaintiff, it is reasonable to view that the overall nature of the compensation for meritorious services is strong.

4. Conclusion

The plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.

[Separate] Relevant statutes: omitted

Judges Cho Jin-un (Presiding Judge) Han-hee Park

1) However, if part of the share of Nonparty 6 was transferred to his children around May 2009 and the co-owners of the instant land added “Nonindicted 9” and “Nonindicted 10” to the co-owners of the instant land, then the above co-owners are referred to as the whole co-owners from the above point of view, it is deemed that the above co-owners are also included.

2) However, although Nonparty 7 is not included in the drafting entity of the instant agreement, the appellate court rendered a judgment that held that four co-owners and Nonparty 7 are liable to pay compensation for meritorious services to the Plaintiff in accordance with the instant agreement.

3) Reference, the Supreme Court rendered a decision to dismiss this part of the claim on July 23, 2015, on the ground that “In spite of the Plaintiff’s claim for the return of total amount of KRW 1,363,631,252, including bank loans and inheritance procedure payment by means of a counterclaim, it constitutes omission of judgment to dismiss this part of the claim without any judgment by the appellate court concerned,” among the judgment of the appellate court of the relevant lawsuit, the part against the Plaintiff on the counterclaim claim is reversed and remanded to the Seoul High Court. After the reversal, the appellate court (Seoul High Court 2015Na21488 (principal claim), 2015Na21495 (Counterclaim)) rendered a judgment to partially refer to the above claim for the payment of the amount, and accordingly the relevant lawsuit was finally concluded.

4) On June 3, 2016, the director of the Seoul Regional Tax Office notified the Plaintiff of the fact that the notice of the result of the instant tax investigation was delayed on the grounds of “decision on whether to recognize the type of income and necessary expenses” and, on March 22, 2018, notified the Plaintiff of the result of the instant tax investigation. However, even though the Plaintiff somewhat ambiguous the purport thereof, the Plaintiff asserts that there is procedural defect in the process of failing to comply with the period for the instant disposition under Article 81-8 of the Framework Act on National Taxes due to the foregoing circumstances, and that there is a need to consider the determination on the illegality of the instant disposition (see, e.g., Supreme Court Decision 2006Da815488, Jun. 3, 2016). However, the director of the Seoul Regional Tax Office did not extend the period for the instant tax investigation, but merely delayed the relevant notice only for further review, it cannot be deemed that there was an error in the law of procedural violation of Article 81-

Note 5) For reference, the case name of the relevant lawsuit is “representative selection”. However, the first claim of the relevant lawsuit is not specifically identified.