Whether the cost of lawsuit, reconciliation cost, etc. directly paid in connection with the increase of compensation for purchase by consultation or expropriation of land, etc. is necessary expenses to be deducted from the transfer value when calculating gains on transfer of land, etc. (affirmative)

Article 97(1)2 of the former Income Tax Act (Amended by Act No. 14389, Dec. 20, 2016); Article 163(3)2 of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 26067, Feb. 3, 2015)

Supreme Court Decision 2016Du1059 Decided April 7, 2017 (Gong2017Sang, 1019)

Plaintiff (Law Firm Sejong, Attorneys Kim Hong-chul et al., Counsel for the plaintiff-appellant)

Head of Central Tax Office

Seoul High Court Decision 2016Nu47477 decided October 6, 2016

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

The grounds of appeal are examined.

1. In light of the legislative purport, etc. of Article 97(1)2 of the former Income Tax Act (Amended by Act No. 14389, Dec. 20, 2016) and Article 163(3)2 of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 26067, Feb. 3, 2015; hereinafter the same), it shall be interpreted that the cost of lawsuit, reconciliation costs, etc. directly paid in connection with the increase of compensation for purchase by purchase or expropriation of land, etc. should be deducted from the transfer value as necessary expenses (see Supreme Court Decision 2016Du1059, Apr. 7, 2017).

2. The reasoning of the lower judgment reveals the following facts.

A. When the instant land was incorporated into a “project for expansion of parking lots within a development-restricted zone” zone, which is a public project, the Plaintiff entered into a contract for purchase to sell the instant land at KRW 981,021,000 on May 8, 2008 (hereinafter “the instant contract for purchase”) and completed the procedure for ownership transfer registration, and thereafter reported and paid the transfer income tax for the said compensation for the year 2008.

B. On July 31, 2009, the Plaintiff had accepted compensation calculated based on the conditions before the development restriction zone was cancelled due to mistake with the owner of other land who responded to the negotiation at the time of the purchase by consultation, and filed a lawsuit against Sucheon-si seeking return of the value around the head of Suwon District Court Nancheon-si, No. 2009Gahap5259 (hereinafter “instant lawsuit”). The above court rendered a judgment on February 16, 2012 as follows: “The head of Sucheon-si is unable to return the original part of the instant land to the Plaintiff; thus, from the market price of the said land, the Plaintiff is 1,531,323,00 won remaining after deducting the amount corresponding to the above part from the compensation already paid to the Plaintiff; and as to the remainder of the instant land, it is possible to return the original part of the instant land, the Plaintiff’s return of the remainder of the compensation and the transfer of ownership to the Plaintiff.”

C. Accordingly, on February 24, 2012, the Plaintiff received the said KRW 1,531,323,000 as the provisional payment of the instant lawsuit from the Sincheon-si, and paid the attorney-at-law appointed at the first instance court on March 30, 2012 totaling KRW 450,000,000 (hereinafter “instant litigation costs”).

D. On May 24, 2013, the Plaintiff filed a revised return of capital gains tax for the year 2008 by adding the above KRW 1,531,323,00 to the transfer value. On April 14, 2014, the Plaintiff filed a revised request to the Defendant for correction to the effect that “the year to which the capital gains tax belongs belongs after deducting the litigation expenses of this case from the transfer value, and revising the year to which the transfer income tax belongs, for the year 2012, to which the date of settlement belongs, refund KRW 184,213,710 from the transfer income tax for the year 2008,” and the Defendant revised the year to which the capital gains tax belongs to the transfer income tax for the year 2012 as of June 12, 2014, but rejected a partial request for correction on the ground that the litigation expenses of this case

E. Meanwhile, on April 8, 2014, the appellate court of the instant lawsuit (Seoul High Court 2012Na30320) rendered a decision as a substitute for the conciliation that “Seocheon-si shall pay to the Plaintiff KRW 2,168,193,000,” and the said decision became final and conclusive around that time.

3. Examining these facts in light of the legal principles as seen earlier, since the conciliation in the instant lawsuit is concluded and the compensation for purchase by previous consultation can be deemed to have been increased accordingly, the relevant lawsuit in the instant case is identical with the lawsuit seeking the increase of compensation in cases where land, etc. is purchased by consultation pursuant to the Act on the Acquisition of Land, etc. for Public Works and the Compensation Therefor. Thus, the litigation costs in the instant case do not differ from the litigation costs directly required in connection with the increase of compensation for purchase by consultation as seen above, and it constitutes the necessary expenses of transferred assets, and thus, they should be deemed as the necessary expenses of transferred assets.

Nevertheless, the court below held that the disposition of this case is lawful, since the cost of lawsuit in this case was incurred due to disputes over the transfer value after the acquisition and transfer of the land in this case, and it does not constitute necessary expenses under Article 163 (3) 2 of the former Enforcement Decree of the Income Tax Act. In so doing, the court below erred by misapprehending the legal principles on necessary expenses of transferred assets, which affected the conclusion of the judgment.

4. Therefore, 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 Kim Shin (Presiding Justice)