[1] The meaning of "Fraud and other unlawful act" under Article 26-2 (1) 1 of the former Framework Act on National Taxes

[2] The case where the nominal Speaker constitutes “Fraud and other unlawful acts” under Article 26-2(1)1 of the former Framework Act on National Taxes

[3] The exclusion period for imposition of corporate tax in case where a transaction is made in the name of a person who is not subject to wrongful calculation and actively handles documents and makes a false statement in the account book in order to conceal that transaction constitutes wrongful calculation under the Corporate Tax Act (=10 years)

[1] The legislative intent of Article 26-2(1) of the former Framework Act on National Taxes (amended by Act No. 8830, Dec. 31, 2007; hereinafter the same) is to extend the exclusion period for imposition of the pertinent national tax to 10 years, since it is difficult for the tax authority to find out that there is any illegal act, such as making it difficult for him/her to find the taxation requirements of the national tax or forging or withdrawing false facts, even though the exclusion period of the national tax imposition right is five years in principle for prompt determination of tax-related relations. Therefore, the exclusion period for imposition of the pertinent national tax is extended to 10 years, because it is difficult for him/her to find it difficult for him/her to do so. Therefore, the term "Fraud or other unlawful act" under Article 26-2(1)1 of the former Framework Act on National Taxes means a deceptive scheme or other active act that makes it impossible or considerably difficult to impose and collect taxes, and it does not constitute a mere failure

[2] Even if income is obtained through a disguised name, when the act is not related to the evasion of tax, it does not constitute “Fraud or other unlawful act” under Article 26-2(1)1 of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007). However, if such act is added to active acts such as preparation of a false sales contract and false payment of the price, false return of capital gains tax, false registration or record, preparation and keeping of a false account book, etc., such act constitutes “Fraud or other unlawful act” under Article 26-2(1)1 of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007).

[3] The amount arising from the difference between the tax accounting and corporate accounting, such as the amount of tax adjustment due to the denial of wrongful calculation under the Corporate Tax Act, shall not be deemed as the amount of income obtained by fraudulent or other unlawful act under Article 26-2 (1) 1 of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007), unless there are special circumstances. However, in cases where anyone who is not subject to wrongful calculation under the Corporate Tax Act trades in the name of a person to avoid the occurrence of tax adjustment by concealing the transaction corresponding to wrongful calculation under the Corporate Tax Act, and actively manipulates documents such as the preparation of a false sales contract and the false payment of the price so that the fact does not occur, even if the amount arising from the difference between the tax accounting and corporate accounting, this constitutes a case where the national tax is evaded due to fraudulent or other unlawful act, and the exclusion period for taxation

[1] Article 26-2 (1) 1 and 3 of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007) / [2] Article 26-2 (1) 1 and 3 of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007) / [3] Article 26-2 (1) 1 and 3 of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 207)

Completion Chemical Co., Ltd. (Law Firm Brew, Attorneys Jeong Sung-chul et al.)

The director of the tax office.

Seoul High Court Decision 2012Nu11449 decided March 22, 2013

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

The grounds of appeal are examined.

1. Article 26-2(1) of the former Framework Act on National Taxes (amended by Act No. 8830, Dec. 31, 2007; hereinafter the same) provides that in principle, five years of exclusion period of national taxes shall be set (Article 3). However, in cases where a taxpayer evades national taxes, or obtains a refund or deduction by fraudulent or other unlawful means, the exclusion period of imposition shall be extended ten years from the date on which the relevant national tax can be imposed (Article 1).

The legislative purport of the above provision is to extend the exclusion period of the imposition of national taxes to 10 years for the purpose of prompt determination of tax-related relations, in principle, in a case where there is any unlawful act such as making it difficult to discover the fact of taxation requirements on national taxes even though the exclusion period of the imposition of national taxes is five years, or making it difficult to find out any false fact, and it is difficult to expect the exercise of the imposition right as it is difficult for the tax authority to find that there is any omission report. Therefore, the exclusion period of the imposition of national taxes is to extend to 10 years for the pertinent national taxes. Therefore, the term “Fraud and other unlawful act” under Article 26-2(1)1 of the former Framework Act on National Taxes refers to a deceptive scheme or other active act that makes it impossible or considerably difficult to impose and collect

2. On June 27, 2001, the lower court acknowledged the Plaintiff’s transfer of KRW 9,550 per share (hereinafter “instant shares”) to Nonparty 1,2,3, and 4 (hereinafter “Nonindicted 1, etc.”) who is a shareholder of the Plaintiff under title trust with Nonparty 5,6,7, and 8 (hereinafter “Nonindicted 5, etc.”) while acquiring KRW 10,00 per share from Nonparty 1, 2, 3, and 4 (hereinafter “Nonindicted 1, etc.”) at a face value per share. On December 31, 2004, the lower court recognized the Plaintiff’s transfer of KRW 10,00 per share value per share to Nonparty 5, etc., by deeming that the Plaintiff actually transferred the instant shares to Nonparty 30,50,000 per share, and the Defendant acquired the instant shares to whom the Plaintiff actually transferred the amount of income and the amount of income accrued for the business year from the purchase during the pertinent period of 205,400,2815, etc.

Furthermore, the lower court determined that the Plaintiff’s act of title trusting the shares of this case to Nonparty 5, etc. constitutes unlawful on the ground that it does not constitute “in cases where the Plaintiff evaded national taxes by fraudulent or other unlawful acts” under Article 26-2(2) of the former Monopoly Regulation and Fair Trade Act (amended by Act No. 7315 of Dec. 31, 2004), which prohibits the Plaintiff from holding and transferring the shares of another domestic company for the purpose of control, constitutes a legal regulation under Article 8-2(2) of the former Monopoly Regulation and Fair Trade Act (amended by Act No. 7315 of Dec. 31, 2004), and that it is difficult to deem that there was an active unlawful act to the extent that the act of title trust alone constitutes tax evasion.

3. However, the lower court’s determination is difficult to accept for the following reasons.

A. Even if income is obtained through a disguised name, if it is not related to the evasion of tax, it does not constitute “Fraud or other unlawful act” under Article 26-2(1)1 of the former Framework Act on National Taxes solely on the basis of the nominal name. However, if it comes from the nominal name for the purpose of tax avoidance, such as avoidance of progressive tax rates, distribution of revenue, application of special cases of exemption and reduction, use of the name of insolvent person who does not pay taxes, etc. Furthermore, if it is added to active acts such as preparation of a false sales contract and false payment, false return of transfer income tax, false registration, false registration and record, preparation and keeping of a false account book, etc., it constitutes “Fraud or other unlawful act” which makes it impossible or considerably difficult to impose and collect taxes.

In addition, the amount arising from the difference between tax accounting and corporate accounting, such as the amount of tax adjustment due to the denial of wrongful calculation under the Corporate Tax Act, shall not be deemed to be the amount of income earned by fraud or other wrongful acts under Article 26-2 (1) 1 of the former Framework Act on National Taxes, except in extenuating circumstances. However, in cases where anyone who is not subject to wrongful calculation under the Corporate Tax Act trades in the name of a person in order to conceal transactions falling under wrongful calculation and make the amount of tax adjustment not to cause any occurrence of the amount of tax adjustment, and actively manipulates documents such as the preparation of a false sales contract and the false payment of the price therefor, and makes a false entry in the account book in order to prevent the occurrence of such fact, even if the amount arising from the difference between tax accounting

B. According to the reasoning of the first instance judgment cited by the lower court and the evidence duly admitted by the lower court, ① DNA, completion oiling and the Plaintiff is an affiliate of the Credit Group, ② Nonparty 1, etc., the honorary chairperson of the Credit Group, was the child or grandchild of Nonparty 9; ② around 2001, the Credit Union requested Nonparty 1, etc., who held DNA stocks, to cooperate in the group’s restructuring when promoting the reorganization of affiliates for the group’s restructuring centered on the Plaintiff, who was an affiliate. The Plaintiff prepared a sales contract with Nonparty 1 and the Plaintiff’s spouse, with the consent of Nonparty 5, etc., and acquired the instant shares at par value. ③ During that process, Nonparty 5 et al. deposited the purchase price of the instant shares received from the Plaintiff into the account of Nonparty 1, etc. as if they were paid by them; ④ At the time of purchase of the instant shares, the Plaintiff did not fall under the sale contract with Nonparty 5, etc. under the name of Nonparty 1, a related party under Article 15(2)1 of the former Corporate Tax Act and Nonparty 5.

Examining the above circumstances in light of the legal principles as seen earlier, the Plaintiff’s act of acquiring and transferring the instant shares in the name of Nonparty 5, etc. was conducted for the purpose of concealing transaction falling under unfair calculation under the Corporate Tax Act, as well as for the purpose of avoiding other legal regulations, and furthermore, an active act such as the preparation of a false sales contract and the false payment of the price, etc. so as not to discover the fact, constitutes “Fraud or other unlawful act” under Article 26-2(1)1 of the former Framework Act on National Taxes. Ultimately, even if the Plaintiff was identified as the actual acquisitor and transferor of the instant shares, and caused the tax adjustment amount due to the rejection of unfair calculation under the Corporate Tax Act, such act shall be deemed as the income amount obtained by the Plaintiff from the said fraud

Nevertheless, the lower court determined otherwise that the exclusion period for imposition should be five years on the ground that the Plaintiff’s act of title trust of the instant shares to Nonparty 5, etc. does not constitute “the case of evading national taxes by fraudulent or other unlawful means.” In so doing, the lower court erred by misapprehending the legal doctrine on “the exclusion period for imposition of tax in the case of evading national taxes by fraudulent or other unlawful means” under Article 26-2(1)1 of the former Framework Act on National Taxes, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal assigning

4. Therefore, without further proceeding to decide on the remaining grounds of appeal, 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 Lee Sang-hoon (Presiding Justice)