Whether the instant construction cost can be deducted as necessary expenses when calculating capital gains tax by deeming it as capital expenditure.

Whether the instant construction cost can be deducted as necessary expenses when calculating capital gains tax by deeming it as capital expenditure.

Article 163 of the Enforcement Decree of the Income Tax Act

2015Gudan12918 Revocation of Disposition of Imposing Transfer Income Tax

AA

Head of Yeongdeungpo Tax Office

May 11, 2016

July 27, 2016

1. The Defendant’s imposition of capital gains tax of KRW 43,207,450 against the Plaintiff on May 12, 2014, exceeding KRW 23,348,420, out of the imposition of capital gains tax of KRW 43,207,450, shall be revoked.

2. The plaintiff's remaining claims are dismissed.

3. Of the litigation costs, 50% is assessed against the Plaintiff, and the remainder is assessed against the Defendant, respectively.

Cheong-gu Office

The Defendant’s disposition of KRW 43,207,450 on May 12, 2014 against the Plaintiff was revoked (it appears that the Defendant’s claim contains an error of “the reversion of year 2009” in the claim).

1. Details of the disposition;

A. On March 9, 2005, the Plaintiff acquired the instant real estate in a voluntary auction procedure with respect to 170-5 OOO center 1209 (i.e., 1209 and 1209-1 due to the subsequent division; hereinafter referred to as “instant real estate”), but transferred it by means of voluntary auction on January 14, 2009.

B. The Plaintiff did not report the transfer income tax on the transfer of the instant real estate. On May 12, 2014, the Defendant decided and notified the Plaintiff that the transfer value of the instant real estate was KRW 316,110,00, the acquisition value was KRW 179,702,80, the necessary expenses was KRW 4,491,090, and KRW 43,207,450 (including additional tax on general non-report, KRW 5,307,715, and additional tax KRW 11,361,163) for the transfer income tax for the year 2009 (hereinafter “the instant disposition”).

C. The Plaintiff underwent the pre-trial procedure.

[Ground of recognition] Facts without dispute, Gap 1 to 4 evidence, Eul 1 evidence (including paper numbers; hereinafter the same shall apply), the purport of the whole pleadings

2. Whether the disposition is lawful;

A. The plaintiff's assertion

Upon the Plaintiff’s acquisition of the instant real estate, the instant real estate was inevitably executed by the Plaintiff by inevitably requesting construction to GG,CC design, and DD construction on April 20, 2005, when the previous owner BB corporation used the instant real estate as a farming place due to the failure of its employees, and the electric power lines, floors, walls, air conditioners, and heating and cooling system were entirely destroyed. The instant real estate was not separated into 1209 and 1209-1 on June 2008. Since the instant real estate was not separated into 1209 and 1209-1 on the following table (hereinafter “the instant table”) for the purpose of use, measurement, or convenience of the transferred asset, the instant disposition of this case was unlawful. Accordingly, the Defendant’s disposal of the instant real estate should be deducted from the transfer value.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

(1) Article 97 (1) 2 of the former Income Tax Act (amended by Act No. 10408, Dec. 27, 2010) provides for "capital expenditure, etc. prescribed by Presidential Decree" as one of the necessary expenses to be deducted from the transfer value, and Articles 163 (3) 1 and 3 and 67 (2) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010) provide that "expenses disbursed for the change, improvement or convenience of use of transferred assets or for the convenience of use" or "repair expenses, etc. disbursed to extend the service life of depreciable assets owned by a business operator or to increase the real value of the relevant assets". Ultimately, in order to constitute a kind of capital expenditure, etc. as necessary expenses, the relevant expenses must be paid for the purpose of extending the service life of the transferred assets or for the alteration, improvement or convenience of use.

On the other hand, the burden of proof on the tax base, which is the basis of taxation, shall be imposed on the tax authority, and the tax base shall be deducted from necessary expenses, so the tax authority shall, in principle, bear the burden of proof on the revenue and necessary expenses. However, since most of the facts causing necessary expenses are in the sphere under the control of the taxpayer, and it is difficult for the tax authority to prove it. Thus, if it is reasonable to prove it as the taxpayer in consideration of difficulty in proving it, equity between the parties, etc., it accords with the concept of fairness (see, e.g., Supreme Court Decision 2006Du16137, Oct. 26, 2007).

(2) We examine the sequence 1 to 3 of the instant table.

(A) In addition to the video of Gap evidence as seen earlier, since it is recognized that the plaintiff used the real estate of this case as a scopic place at the time of acquiring the real estate of this case on March 9, 2005 through a voluntary auction procedure and caused a tent, wall, etc., it is necessary to construct a restoration work for the damaged part of the real estate of this case after the plaintiff acquired the real estate of this case.

(B) First of all, the following circumstances acknowledged by adding the whole arguments to health stand, Gap evidence 10, Eul evidence No. 2 as to the No. 1 of the table of this case, namely, the plaintiff prepared a contract for construction works with EE, which is the representative ofCC design, with removal work, electricity and lighting work, painting work, and air conditioner work, etc. on April 20, 2005, EE sent a estimate of KRW 9,418,000 to the plaintiff before preparing the above contract, but it appears that it would be difficult for the plaintiff to adjust the construction cost to KRW 9,20,000,000 to the plaintiff. The plaintiff paid KRW 110,000 to EE on May 16, 2005, which appears in the name of FF, which appears to have been actually paid to EE on May 4, 2005, which appears to have been paid to the plaintiff 200,000 won for the removal of real estate under the name of E-14.

However, in addition to the statement of Nos. 10 and 10 with respect to other works among the works of the instant table No. 1, it is recognized that other works include fish, fixed windows, burners, image months, and sshing paths, and that such other works do not seem to be works to extend the useful life of transferred assets or to increase the real value thereof, or works to change the purpose of use, improve, or promote the use thereof. Therefore, the Plaintiff’s assertion about other works is without merit without any need to further examine.

Therefore, among the Nos. 1 of the table of this case, removal works, partitions construction works, electricity and lighting works, painting construction works, painting construction works, and air-conditioning construction costs of KRW 7,747,660 [the construction cost of KRW 920,00 under the contract for construction works shall be KRW 520,00,000 for removal works (2,725,00), partitions construction (760,000), electricity and lighting construction (1,1190,000), painting construction (1,200,000 won), and the sum of KRW 7,535,000 for air-conditioning construction (10%), and KRW 9,418,00 for corporate profits (15%) are negotiated with KRW 92,00,000 for expenses related to air-conditioning construction works, and the Plaintiff’s assertion that the construction works and other necessary expenses shall be less than KRW 167,707,00 for less than 706,7467

(C) Next, in light of the following circumstances, which are acknowledged by adding the overall purport of the pleadings to the items in the evidence Nos. 2 and 9 and 10 regarding the title 2 of the instant table, the Plaintiff’s assertion (Evidence No. 9) that the Plaintiff was partially entrusted with the construction work to GGra, namely, the construction work contents in the quotation and the construction cost that the Plaintiff deemed to have been entrusted to the design, and the part of the construction cost that the Plaintiff was partially recognized as necessary expenses, there is insufficient evidence to acknowledge whether the No. 2 work was actually carried out, and this part of the Plaintiff’s assertion is without merit without any need to further examine.

(D) Next, the following circumstances acknowledged by adding the overall purport of the pleadings to the statement No. 11 on the title No. 3 of the instant table, namely, the Plaintiff’s assertion that he/she ordered DNA architecture to contract the construction of the office, and submitted a quotation (Evidence No. 11). However, considering that the contents of a quotation are merely the floor construction, wall structure construction, ceiling construction, and other construction, and the details of the specific construction are not specified, there is insufficient evidence to prove whether the title No. 3 construction was actually carried out, and thus, the Plaintiff’s assertion in this part is without merit, without any need to further examine.

(3) We examine the sequence 4 to 6 of the instant table.

(A) In addition to the images of Gap evidence No. 8, the plaintiff was found to have divided the real estate of this case into 1209 and 1209-1 on or around June 2008, and thus, it is recognized that the construction of separation of the real estate of this case was done around that time.

(B) First of all, as to the design cost Nos. 4 and 5 of the instant table, considering the following circumstances acknowledged by adding the overall purport of the pleadings to the health department, Gap's evidence Nos. 4 and 5, namely, when the instant real estate was divided into 1209 and 1209-1, it appears that the preparation of the drawing would have been entrusted to the Dong real estate of the comprehensive architect office. On June 20, 2008, the Dong real estate office of the general architect office issued a receipt of KRW 50,000 to the Dongyang Electronic Co., Ltd., Ltd., Ltd., the Plaintiff and the name of the representative director was similar to the FF of the Plaintiff, and even if the Plaintiff leased the instant real estate to FF, the construction company divided the instant real estate into 1209 and 1209-1, the Plaintiff appears not to be the FF, the lessee of the instant real estate, but to be the repair cost disbursed by the Plaintiff to increase the real value of the instant real estate.

(C) Next, as to the No. 5 of the instant Table, the following circumstances acknowledged by adding the overall purport of pleadings to the Health Team, Gap’s evidence No. 12, namely, HH corporation’s temporary installation work, wall installation work, wood-frame installation work, basic wood-conditioning installation work, glass, air-conditioning installation work, removal work at the entrance of space, metal installation work, etc., which appears to have been estimated at KRW 4.5 million from HH corporation around June 2008, and accordingly, the Plaintiff appears to have performed the subsequent construction work. The receiver of the said quotation is not FF corporation, but the Plaintiff is the Plaintiff, and the temporary installation work, wall installation work, wall installation work, wood-conditioning installation work, basic wood-conditioning installation work, glass removal work, metal removal work, metal removal work, etc., which appears to have been for the purpose of increasing the real value of the instant real estate, and it is difficult to view that the Plaintiff actually paid the construction work cost before June 2008 from the instant disposition, the Plaintiff’s removal of basic material frame and material.

However, among the Serial 5 projects in the table of this case, with respect to the wholesale work, external work (walling work, color glas work), film work, sgn work, floor construction work, health stand, the above construction work does not seem to be a construction work to extend the lifespan of the real estate of this case or to increase the real value thereof, or a construction work to change the purpose of use, improve or convenience the use thereof. Therefore, the plaintiff's assertion on this part of the construction work is without merit, without further review.

In addition, considering the following circumstances, which are acknowledged by adding the overall purport of arguments to the statements in the evidence Nos. 5 and 12 and 13 with respect to electrical construction among the Nos. 5 of this case’s table, under the estimates for the preparation of HH stock company, the electrical construction is stated to the effect that the specialized company should be selected and implemented, and the construction cost is identical to the construction cost stated in the estimates of the II of the corporation, the construction cost and the estimate of H stock company, and the construction cost, it is insufficient to recognize that the Plaintiff spent the above electrical construction cost to H stock company. Thus, the Plaintiff’s assertion on electrical construction is without merit.

Therefore, during the Nos. 5 of the table of this case, temporary installation works, bricks works, wooden works, basic wood mold works, glass works, air-conditioning installation works, entrance removal works for spaces, metal works, electrical construction works, and expenses related to the completion works related thereto = KRW 29120,00 [ KRW 100,000 + Walls construction (200,000) + KRW 7120,000 + Basic wood mold construction (4.650,000 + KRW 3.4.4 million + 3.4 million + 3.2 million + 3.2 million + removal works at the entrance of an expanded space (2.2 million) + metal works (2.2 million) + 3.5 million won). Thus, this part of the Plaintiff’s assertion is reasonable within the scope of KRW 2912,129,000.

(D) Next, considering the following circumstances, which are acknowledged by adding the overall purport of arguments to the statements in the evidence Nos. 12 and 13 as to the No. 6 of the instant table, that is, the Co., Ltd. II: (a) appears to have performed a construction to separate electrical facilities with respect to the separation of the instant real estate; and (b) such electrical construction appears to have been a construction to practically increase or improve the value of the instant real estate, the electrical construction cost of KRW 4.3 million is deemed to be necessary expenses. Accordingly, the Plaintiff

(4) The theory of lawsuit

Therefore, the plaintiff spent the total amount of KRW 41,667,660 [the total amount of KRW 41,667,660 [the total amount of KRW 41,747,660 (part of the 1 construction work in order) + 500,000 + KRW 4120,00 (part of the 5 construction work in order) + 430,000 (the 6 construction work in order)] as necessary expenses. Thus, the above KRW 41,667,660 should be deducted from the transfer value

(d) Calculation of justifiable capital gains tax;

If the Plaintiff calculates the capital gains tax to be paid on the basis of the above facts of recognition, the portion exceeding KRW 23,348,420 of the instant disposition is unlawful.

3. Conclusion

Thus, the plaintiff's claim is accepted within the above scope of recognition, and the remaining claims are dismissed as they are without merit.