Income accrued from the transfer of the instant land to the purchaser shall be deemed capital gains, not business income.

In light of the fact that the instant land is only two parcels, and that only the facilities, such as the advertising tower, installed on the instant land, can be removed and transferred as they are, the transfer of the instant land constitutes capital gains because it is difficult to deem that the transfer of the instant land has continuity and repetition, and as such, the exclusion period for imposition of ten years should be applied.

Article 88 of the former Income Tax Act and Article 26-2 of the Framework Act on National Taxes

2014Guhap21011 Revocation of Disposition of Imposing capital gains tax

Park AA

Head of Sungbuk Tax Office

December 18, 2015

January 29, 2016

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s disposition of imposition of capital gains tax of KRW 1,979,983,060 (including additional tax) for the Plaintiff on January 2, 2014 shall be revoked.

1. Details of the disposition;

A. On January 12, 2007, the Plaintiff: (a) sold BB and CCC (hereinafter collectively referred to as “Buyers”); (b) sold BB and CCC ( collectively referred to as “instant sales contract”) for KRW 2.10 million to buyers, and (c) did not complete the registration of ownership transfer on the instant land, to the buyer.

B. On the instant land, the buyer newly constructed and sold multi-household housing 19 households (hereinafter “instant housing”). On the other hand, on March 20, 2007, the Plaintiff filed a business registration for new housing sales business under the Plaintiff’s name, and obtained a new construction permit from the head of the Seoul Special Metropolitan City OO on March 23, 2007. The Plaintiff filed a comprehensive income tax for each of the pertinent years, including business income 1,236,54,400, and business income 222,935,586, and business income 102,35,50,500 for the year 2008, generated from the sale and purchase or auction of the instant housing.

C. On January 2, 2014, the Defendant decided and notified the Plaintiff of KRW 1,979,983,060 (including additional tax without filing an unfair report, KRW 393,634,803 and additional tax for unfaithful payment, KRW 602,261,249) for the reason that the Plaintiff did not complete the registration of ownership transfer in the name of the purchaser and completed the registration of new housing sales business and filed a comprehensive income tax return by concealing the transfer of the instant land in a fraudulent or other unlawful manner (hereinafter referred to as the “disposition”).

D. The Plaintiff appealed and filed an appeal on April 1, 2014, but the Tax Tribunal rendered a decision to dismiss the said appeal on September 5, 2014.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1, 8, 9, Eul evidence Nos. 1, 6, 7, 12, 16, 17, and 18 (including relevant numbers), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) On February 16, 2007, the Plaintiff entered into a joint agreement with the buyer to newly construct and sell the instant housing on the instant land (hereinafter referred to as the “instant agreement”), and participated as the purchaser of the instant land among the new housing construction and sale projects with the burden of all the responsibilities and obligations on the instant land, and the instant land was sold to many unspecified buyers. Meanwhile, the Plaintiff acquired the instant housing in spite of the buyer’s burden of the construction cost, and the Plaintiff paid the lease deposit and the sales contract to the lessee and the seller. Comprehensively taking account of the following: (a) the Plaintiff was an anonymous association’s business as a business operator with respect to the new housing construction and sale project of this case; and (b) the income accrued from the process of performing the new housing construction and sale project of this case ought to be regarded as business income; and (c) the entire disposition of this case was unlawful on any other premise.

2) Even if the instant agreement is deemed a sales contract, in view of the fact that the Plaintiff was not paid KRW 10 million out of the purchase price 2.1 billion, and that the buyer offered the instant land as security during the process of borrowing KRW 900 million from financial institutions, and the risk of repayment of KRW 900 million has not been resolved, the instant land did not be liquidated.

In addition, the buyer did not complete the ownership transfer registration for the instant land. Therefore, since the instant land cannot be deemed to have been transferred to the buyer, the instant disposition that was based on the premise that the instant land was transferred to the buyer is unlawful.

3) The Plaintiff thought that the Plaintiff would jointly participate in the instant new housing construction and sale business and did not think that business income tax would be paid, but did not think that the transfer of the instant land and the occurrence of capital gains would be concealed; the Plaintiff and the purchaser prepared a double contract with the transfer value of the instant land at KRW 1.7 billion between the Plaintiff and the purchaser, but the said contract was destroyed upon the rescission of the instant contract, and was not submitted to the tax office; the instant agreement was concluded for the Plaintiff and the purchaser to jointly carry out the instant new housing construction and sale business and was not intended to conceal the transfer of the instant land by fraud or other unlawful means; and the Plaintiff did not evade national tax by fraud or other unlawful means. In addition, the Plaintiff recognized the income accrued from the instant new housing construction and sale business as business income and filed a tax base return by the statutory due date

Therefore, the exclusion period of imposition applicable to the transfer income tax belonging to the year 2007 is five years, and the disposition of this case was made after the expiration of the exclusion period of imposition.

4) Even if the principal portion of the instant disposition is lawful, the Plaintiff did not actively act to manipulate capital gains as business income; when interpreting the meaning of the instant agreement, it is unclear whether the Plaintiff participated in the instant new housing construction/sale business or simply sold the instant land; and the Plaintiff believed that the Plaintiff participated in the instant new housing construction/sale business as a purchaser of land in the instant new housing construction/sale business; and reported the income generated during the instant business process as business income and paid the business income in good faith, there exists a justifiable reason to reduce penalty tax, and thus, the penalty tax portion among the instant disposition is unlawful.

B. Relevant statutes

It is as shown in the attached Form.

(c) Fact of recognition;

1) On January 12, 2007, the buyer paid to the Plaintiff the down payment of KRW 210 million under the instant sales contract, and the buyer BB paid KRW 50 million to the Plaintiff on February 16, 2007, and the buyer CCC paid KRW 480 million on the same day, respectively. In addition, on July 2, 2007, the buyer paid KRW 900 million to the Plaintiff with the money loaned from the DF Cooperatives (hereinafter “DF”) on the security of the instant land, with the money loaned from the DF Cooperatives (hereinafter “DF”) on July 4, 2007.

2) On February 16, 2007, the Plaintiff and the buyer drafted a sales contract with the purchase price of the instant land KRW 1.7 billion. The Plaintiff and the buyer drafted an agreement with the effect that the instant sales contract will be rescinded on the same day, while entering into the instant agreement (see, e.g., evidence A).

3) On February 16, 2007, the buyer completed the provisional registration of the right to claim ownership transfer, which was made on February 16, 2007, with respect to each one-half share of the site portion of O-dong 596-3 among the land of this case, and the above provisional registration was cancelled on July 2, 2007. The buyer completed the provisional registration on July 4, 2007 as to each share of the site portion of O-dong 596-3 among the land of this case on July 4, 2007, on July 14, 2007, the provisional registration was cancelled on February 14, 2008. In addition, on February 19, 2008, the buyer completed the provisional registration on February 19, 2008, each of the above provisional registration was canceled on the buyer’s right to claim ownership transfer under the name of the FCC on February 18, 2008.

4) Meanwhile, on March 1, 2007, the buyers entered into a joint project agreement with the content that they jointly conduct the business of newly building and selling the instant housing on the instant land, including land purchase expenses, construction expenses, sales expenses, and general management expenses, and that they would reflect all expenses, such as general management expenses, and revenues from the said project.

5) 원고는 2007. 6. 18. GG은행에서 원고 명의로 계좌(XXX-XXXXXX-XXXXX)를 개설하였는데, 위 계좌는 이 사건 주택의 건축비 등 비용과 이 사건 주택의 분양으로 인한 수익을 관리하는 데에 사용되었고, 매수인들이 그 통장과 도장을 공동으로 관리하였다.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 2, Eul evidence Nos. 3, 4, 5, 8 through 11, 13, 14, 20, 21 and 22, and the purport of the whole pleadings

D. Determination

1) Whether the Plaintiff transferred the instant land to the buyer

A) According to the main sentence of Article 88(1) of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same), the term "transfer", which is subject to capital gains tax, is to be actually transferred for price due to sale, etc., regardless of the registration or enrollment of the assets.

In addition, according to Article 98 of the former Income Tax Act and Article 162 (1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 20720 of Feb. 29, 2008), the transfer time of assets is, in principle, the date of liquidation of the price of the assets.

B) The facts acknowledged earlier, and considering the following circumstances revealed in addition to the purport of the entire pleadings as seen earlier, the purchaser paid the Plaintiff the full amount of KRW 2.1 billion, which is the purchase price of the instant land, from January 12, 2007 to July 4, 2007, pursuant to the instant sales contract, based on the following circumstances, the purchaser settled the purchase price of the instant land on July 4, 2007.

(1) In the course of the tax investigation, the purchaser stated that the Plaintiff prepared a false agreement on the cancellation of the instant sales contract on the wind that the Plaintiff would have a concern that the transfer income tax would be excessive, and that the purchaser made a false statement on February 16, 2007, which made the sales price of the instant land at KRW 1.7 billion. In light of these circumstances, the instant sales contract appears to remain effective without being rescinded.

(2) Until July 4, 2007, the buyer paid KRW 2090 million to the Plaintiff out of the purchase price of the instant land. The Plaintiff offered the instant land to DDR as collateral and the buyer granted loans from DDR and repaid KRW 900 million to the Plaintiff EE Bank is paid as the purchase and sale balance of the instant land is paid as stipulated in the instant agreement. Thus, even if the Plaintiff secured the buyer’s property to secure the buyer’s property to secure the buyer’s property to secure the obligation of KRW 900 million, the said KRW 90 million should be deemed as the final payment to the Plaintiff as the purchase and sale balance of the instant land.

(3) In the course of the tax investigation, the purchaser stated that all of the purchase price of the instant land was paid to the Plaintiff. In addition, on July 4, 2007, the purchaser completed the registration of ownership transfer claim as to each of 1/2 shares of the instant land among the instant land from the Plaintiff. This is a measure taken by the purchaser who had not completed the registration of ownership transfer as to the instant land, even if the purchase price was fully paid, to ensure the implementation of the procedures for ownership transfer registration or the return of the purchase price. Comprehensively taking account of these circumstances, the purchaser appears to have paid KRW 10 million out of the purchase price of the instant land to the Plaintiff on July 4, 2007.

C) If so, the instant land was actually transferred at a price to the purchaser on July 4, 2007, when the purchase price was settled, the Plaintiff should be deemed to have transferred the instant land to the purchaser on July 4, 2007. The Plaintiff’s assertion that the instant land was not transferred to the purchaser is without merit.

2) Whether income from the transfer of the instant land is subject to taxation of capital gains tax

A) Whether the income from the transfer of real estate is business income or capital gains under the Income Tax Act ought to be determined in accordance with social norms, taking into account the transferor’s acquisition and holding of real estate, whether the transferor’s acquisition and holding of real estate, whether the transfer is made, the scale, frequency, mode, and other parties of the transfer, whether the transfer aims at profit-making, and whether the transfer is continuous and repeated to the extent that it can be seen as business activities (see, e.g., Supreme Court Decisions 83Nu66, Sept. 11, 1984; 2008Du21768, Jul. 22, 2

B) Based on the above legal principles, considering the following circumstances, which can be seen by adding up the purport of the entire arguments in the evidence as seen earlier, it is difficult to view that the Plaintiff transferred the instant land to the purchaser by means of a tool to conduct the new construction and sale business of the instant housing jointly with the purchaser, and the Plaintiff is merely the Plaintiff’s transfer of the instant land once.

(1) The agreement between the Plaintiff and the buyer to cancel the instant sales contract and the sales contract to reduce the sales price of the instant land to KRW 1.7 billion, but the conclusion of the instant agreement between the Plaintiff and the buyer is anticipated to be excessive in capital gains tax on the transfer of the instant land, and the purpose of reducing the Plaintiff’s tax burden is to reduce the Plaintiff’s tax burden.

(2) The buyer did not include the Plaintiff in the parties to the joint agreement concluded on March 1, 2007, which was one month after the date of the conclusion of the instant agreement, and the said joint agreement stipulates that only the buyers divide the costs and profits incurred from the instant new housing construction and sale business. In addition, the buyer stated that there was no person who participated in the instant new housing construction and sale business in the course of the tax investigation.

(3) The purchaser appears to have directly operated the new construction of the instant housing, and the purchaser appears to have performed the sales and lease of the instant housing. The purchaser managed and used the Plaintiff’s account opened to conduct the new construction and sale of the instant housing.

(4) The Plaintiff’s return of the lease deposit and the sales contract deposit to the lessee and the seller of the instant housing was merely due to the Plaintiff’s completion of the registration of ownership preservation pursuant to the instant agreement, and it is difficult to view that the Plaintiff participated in the construction and sales contract of the instant housing as a joint proprietor of the instant housing business on account of such circumstance.

(5) In light of the fact that the instant land is merely two parcels, and that only the Plaintiff removes the facilities, such as an advertising tower, installed on the instant land, and appears to have been transferred to the buyer as they are, it is difficult to view that the instant land is transferred to the buyer to the extent that it can be seen as business activity and repeated.

C) Therefore, income accrued from the Plaintiff’s transfer of the instant land to the buyer ought to be deemed as capital gains, not business income. On a different premise, the Plaintiff’s assertion on this part is without merit.

3) Whether the exclusion period has expired

A) According to the main sentence of Article 26-2(1)1, 2, and 3 of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007; hereinafter the same), and Article 12-3(1)1 of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 19893 of Feb. 28, 2007), national taxes, the tax base and tax amount of which are reported, shall not be imposed after the lapse of 5 years from the following day of the deadline for filing a return or the deadline for filing a return on the tax base and tax amount of the relevant national tax (hereinafter referred to as “one association member’s relocation right”). However, if the taxpayer fails to file a return of tax base within one association member’s relocation right, seven years from the following day of one association member’s relocation right, and if the taxpayer evades national tax due to fraud or other unlawful act, the period for exclusion of imposition shall be extended until the expiration of 10 years following year.

The legislative purport of Article 26-2(1) of the former Framework Act on National Taxes is to extend the exclusion period of the imposition of national taxes to 10 years, in principle, in a case where there is an unlawful act, such as making it difficult for the tax authority to discover the taxation requirements of national taxes or forging false facts, while the exclusion period of the imposition of national taxes is five years in order to promptly determine tax relations, and it is difficult for the tax authority to expect the exercise of the imposition of national taxes. Therefore, the "Fraud and other unlawful act" under Article 26-2(1)1 of the same Act refers to a deceptive scheme or other active act, which makes it difficult or considerably difficult to impose and collect taxes impossible or difficult, and it does not constitute a mere failure to file a tax return or making a false tax return without accompanying any other act, but it can be deemed that it was impossible or considerably difficult to impose and collect taxes in addition to the circumstances showing active concealment intention, such as not intentionally entering revenues, sales, etc. in the account book (see, e.g., Supreme Court Decision 2013Du261515267.

B) In light of the aforementioned legal principles and the following circumstances revealed by adding up the purport of the entire arguments, the Plaintiff’s evasion of capital gains tax, which is a national tax, by fraud or other unlawful act. Thus, the ten-year exclusion period of imposition should apply to the instant disposition.

(1) On February 16, 2007, the Plaintiff drafted an agreement stating that the instant sales contract was cancelled by falsity, and had an intermediary cancel the report of real estate trading to the Gwangjin-gu Seoul Special Metropolitan City Office.

(2) In addition, the Plaintiff transferred the instant land to the purchaser on July 4, 2007, but did not complete the registration of ownership transfer for the instant land in the future of the purchaser.

(3) As seen earlier, the instant new housing construction and sale business is operated jointly by only the buyers. As such, the Plaintiff, after completing business registration for a new housing sale business under his own name, obtained permission for new construction of the instant housing, and completed registration of ownership preservation of the instant housing, created the appearance of the Plaintiff, which seems to run the instant new housing construction and sale business.

(4) The Plaintiff solely reported the business income generated from the instant new housing construction and sale business from 2008 to 2011 on the basis of the disguised business name as above.

C) As seen earlier, inasmuch as the instant land was transferred to the buyer on July 4, 2007, the exclusion period for imposition of the transfer income tax of this case would run from June 1, 2008. The instant disposition was lawful since it was made within the exclusion period from June 1, 2008 to 10 years from June 1, 2008, and thus, the Plaintiff’s assertion on this part is without merit.

(iv) the existence of justifiable grounds for an additional duty reduction or exemption

A) In order to facilitate the exercise of taxation rights and the realization of tax claims, additional tax under the tax law is an administrative sanction imposed in accordance with the provisions of the tax law in cases where a taxpayer violates a tax return and tax liability without justifiable grounds, and the taxpayer’s intention and negligence is not considered. On the other hand, it is unreasonable to deem that the taxpayer was not aware of his/her duty, and that such a sanction is unreasonable, or that it is unreasonable to expect the taxpayer to fulfill his/her duty, and that it is unreasonable to assume that the taxpayer was not aware of his/her duty (see, e.g., Supreme Court Decision 2010Du1622, Apr. 28, 201).

B) In light of the fact that the Plaintiff did not complete the registration of ownership transfer of the instant land to the purchaser, and only the purchaser participated in the instant new housing construction and sale business, thereby actively concealing the transfer transaction of the instant land and the income accrued therefrom, it is difficult to deem that there is a justifiable reason not to charge the Plaintiff who did not report and pay the transfer income tax on the income accruing from the transfer of the instant land.

C) Therefore, the part of the penalty tax in the instant disposition is legitimate, and the Plaintiff’s assertion on this part is without merit.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit. It is so decided as per Disposition.