Cho High Court Decision 2009J3119 ( December 14, 2009)

Transferred land is not fixed assets used directly for the real estate lease business.

Since the transferred land is not a fixed asset used directly for the real estate lease business, it does not correspond to the fixed asset for business under Article 32 (1) of the Act, taxation of capital gains tax is legitimate.

2010Nu31807 Revocation of Disposition of Imposing capital gains tax

Gyeong Kim

O Head of tax office

1. The plaintiff's appeal is dismissed.

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

The judgment of the first instance shall be revoked. The disposition of imposition of capital gains tax of KRW 325,313,010 rendered by the Defendant to the Plaintiff on February 1, 2009 shall be revoked.

1. Details of disposition;

The reasoning for this part of this Court is that the relevant part of the reasoning for the judgment of the court of first instance (from the second to the fifth below) is the same as that of the corresponding part of the reasoning for the judgment of the court of first instance, and thus, it shall be cited in accordance with Article 8(2) of the Administrative Litigation Act and the text

2. Whether the disposition is lawful;

A. The plaintiff's assertion

In full view of the fact that the Plaintiff, the owner of the disputed land, is a real estate lessor, that the key land is being used as a factory site for BBB “BB” (hereinafter “BB”), that is, the lease contract between the Plaintiff and BB was concluded between the Plaintiff and the Plaintiff, that the Plaintiff received monthly rent from CC Co., Ltd. (hereinafter “CC”) which transferred the key land from BBB, the key land constitutes a fixed asset for business subject to carry-over taxation under Article 32(1) of the Restriction of Special Taxation Act (hereinafter “the Restriction of Special Taxation Act”).The instant disposition taken on the premise that the key land is not a fixed asset for business purposes is unlawful, or that the pertinent land is not a fixed asset for business purposes.

The entries in the attached Table-related statutes are as follows.

(c) Fact of recognition;

1) Real estate rental business made by the Plaintiff

On July 20, 1991, the Plaintiff registered as a real estate rental business operator (business operator 126-12-15832, non-residential building rental business) (business operator 126-15832, non-residential building rental business) with two parcels of land, which are located in Gyeonggi-do DDDDDDDDD EE Ri 258-2, and two parcels of land. The Plaintiff reported and paid value-added tax on real estate rental business from January 2004 to February 2005. The Plaintiff was not registered as a rental business operator for the key land or filed a value-added tax return before the disposition of this case is taken. The Plaintiff reported to the district tax office having jurisdiction over the instant disposition of this case from January 2005 to February 2, 2006 that the Plaintiff obtained the profit from the land lease amounting to 4,545,455 won each month.

2) Key land status, etc.

The key land is being used as BB car site. The key land is the establishment registration of a neighboring mortgage as BBB orCC. The Plaintiff’s total maximum debt amount for the establishment registration of a neighboring mortgage on the key land at the time when the Plaintiff invested the key land in kind in a newly incorporated corporation is about KRW 3.85 billion.

3) Status of the establishment of a new corporation

The new corporation was established on February 7, 2006 for the purpose of "development, dissemination, maintenance, and repair of software." The new corporation's head office is the fourth floor of 38-7 H building in Seoul FF-Gu, GG-dong 38-7, and the representative director is ASEAN Kim J, the plaintiff. The plaintiff was invested in kind in 303,360 shares of the new corporation (75.78%) by investing in kind the land at issue (value value of 1.51,68 million won). KimJ invested in kind the land at issue in kind. The new corporation invested in kind the land at issue and invested in kind the land at issue inCC until May 8, 2006."

BB was established on June 21, 1995 for the purpose of automobile disassembly improvement project, etc., and the location of its head office is KLL LL 282 in the Gyeonggi-do Do Do Do Do Do Do Do Do Do Do Do Do Do. At 2004, the Plaintiff was holding 48% of the BB shares, and KimJ held 34% of the BB shares. The Plaintiff and Kim JJ did not own BB shares since January 1, 2005 by disposing of the entire BB shares (transfer) around 2004. The KimJ held office as the representative director of BB by May 2004.

CC was established on October 19, 199 for the purpose of manufacturing and selling computer software and manufacturing and selling motor vehicle-related devices.CC head office is Gyeonggi DDD MM NA NA 282.CC representative director is the Kim JJ, the plaintiff.

5) Other circumstances

A) On March 1, 1992, the Plaintiff entered into a lease agreement with four (4) RedO et al. and 4 (4) of the key land, which provides that the term of the contract shall be until March 1, 1997, with respect to the Gyeonggi DM MN NA N282 of Gyeonggi-do and its ground buildings, the lease deposit shall be KRW 50 million, and the rent shall be KRW 50 million for six (6) months from the date of commencing the business, but shall be adjusted thereafter.

B) From December 2004 to April 2006, Kim J remitted 5 million won per month to the deposit account in the name of the Plaintiff (except for November 2005). From May 2006 to September 2006 (except for July 2006), Kim J remitted 3 million won per month.

【Ground for Recognition: Facts without dispute; Gap evidence 3; Gap 6 through 17; Gap 19; Gap 21 to 25; Eul 2 through 8; witness KimP of the first instance trial; witness Kim PP of the first instance trial; the whole purport of each of the testimony and the whole pleadings of the first instance trial】

D. Determination

1) Article 32(1) of the Restriction of Special Taxation Act (hereinafter “the Restriction of Special Taxation Act”) provides that “where a resident makes an investment in kind of fixed assets for business, the said fixed assets for business may be subject to the carried-over taxation.” According to Article 31(1) of the Act and Article 28(2) of the Enforcement Decree of the Act, “fixed assets for business”, which are the object of investment in kind, refers to “type assets and intangible assets directly used for the pertinent business.” Therefore, in order for the Plaintiff to be subject to the carried-over taxation on the key land by investing the key land in kind in a new corporation, the key land should first be used directly for the pertinent business.

2) The Plaintiff asserts to the effect that the pertinent land constitutes a tangible asset directly used by the Plaintiff for real estate rental business, since the Plaintiff leased the key land to BB and received monthly rent fromCC (CC).

As seen above, the Plaintiff entered into a lease agreement with the HongO on the Gyeonggi-do MM NA NA N2 and its ground buildings among the issues on March 1, 1992, and it is recognized that the Plaintiff received KRW 5 million or KRW 3 million every month from the Kim JJ at the time of the investment in kind of the land at issue, but in full view of the following circumstances, the Plaintiff does not seem to have leased the land at issue to BB orCC.

A) BB is a corporation established on June 21, 1995, and the Plaintiff was a major shareholder of BB by 2004. BB andCC received a loan by providing the key land as a water collateral. The Plaintiff was not registered as a rental business operator for the key land before the instant disposition was issued, and did not report and pay value-added tax, etc. on the leased land. There was no lease agreement between the Plaintiff and BB.

B) After the instant disposition, the Plaintiff reported that the Plaintiff obtained KRW 4,545,455 per month from BB from January 1, 2005 to February 2, 2006 at the tax office having jurisdiction over BB. However, the details of transactions (Evidence B 25) submitted by the Plaintiff as evidence only include the details of transfer to the Plaintiff by the Plaintiff, who is the Plaintiff, not the BB, but the ASEAN. The period of transfer of money is KRW 500,00 per month from December 2004 to April 2006, and is KRW 3 million every month from May 1, 2006 to September 2006. The Kim Jong-J was not a shareholder of the Plaintiff, and it is difficult to view that the Plaintiff paid the Plaintiff rent to the Plaintiff, not the Plaintiff’s 2,000,000,000 won, as otherwise alleged by the Plaintiff, the Plaintiff paid the money to the Plaintiff.

C) BB continues to use the key land as a factory site. While BBB uses the key land, there is no reason to transfer the key land toCC. The sub-lease contract concluded between BB andCC was not submitted. The KimJ did not transfer money to the Plaintiff in the name of the representative ofCC. Meanwhile, the Plaintiff stated that BB representative director was A Kim J in the first instance trial that he did not receive any separate rent (see, e.g., preparatory brief dated April 6, 2010).

3) The key land is not fixed assets directly used by the Plaintiff for real estate rental business, and does not constitute fixed assets for business under Article 32(1) of the Act. The Plaintiff’s assertion is without merit.

3. Conclusion

The judgment of the first instance is justifiable, and the plaintiff's appeal is dismissed.