In cases where an unrecoverable claim is not appropriated as deductible expenses for the business year in which the registration date of the merger falls, even though the fact that the total amount of the claim of the extinguished corporation could not be recovered due to the discontinuation of the debtor's business at the time of the merger has already been objectively determined, whether such bad debt shall be included in deductible expenses for the business year in which the registration date of the merger of the extinguished corporation is the date of the merger (affirmative), and whether the same applies to cases where there is no intention or gross negligence

According to Article 19-2(1) and (5) of the Corporate Tax Act and Article 19-2(1)8, (3)1, and (2) of the Enforcement Decree of the Corporate Tax Act, the amount of bonds which cannot be recovered due to reasons prescribed by Presidential Decree, such as the debtor's bankruptcy, among bonds held by a domestic corporation (hereinafter "deductible expenses") shall be included in deductible expenses for the purpose of calculating the amount of income for the pertinent business year; and among bonds, the period for inclusion of deductible expenses of "bonds which cannot be recovered due to the debtor's bankruptcy, compulsory execution, execution of punishment, discontinuance of business, death, disappearance, disappearance, or missing (hereinafter "unrepaid bonds")" is the business year which includes the date on which the relevant cause arises and counted as deductible expenses. In such cases, unlike the amount of credit sales, etc., the period for inclusion of deductible expenses as of the time when it is appropriated as deductible expenses for the business year to which the relevant cause occurred, is not legally extinguished, but in view of the debtor's financial status, ability to pay, etc.

However, Article 19-2(4) of the Enforcement Decree of the Corporate Tax Act provides that “If a corporation merges with another corporation, notwithstanding paragraph (3) 2, and a bad debt falling under paragraph (1) 8 is not appropriated as deductible expenses by the business year which includes the date of the registration of the merger, the bad debt shall be deemed deductible expenses of the business year which includes the date of the registration of the merger of the relevant corporation.” This purpose is to uniformly determine the time when a corporation performs expenses which are not appropriated as bad debt by the time of the merger regardless of whether the corporation is aware of tax accounting for the business year which includes the date of the registration of the merger. Therefore, even if the fact that it was objectively determined that it was impossible to recover all of the debt of the extinguished corporation due to the discontinuation of its business, even if it was not appropriated as deductible expenses of the business year which includes the date of the registration of the merger, the bad debt shall be deemed deductible expenses for the business year which includes the date of the registration of the merger of the extinguished corporation pursuant to Article 19-2(4) of the Enforcement Decree of the Corporate Tax Act.

Article 19-2(1), (5), and Article 44 of the Corporate Tax Act; Article 19-2(1)8, (3), and (4) of the Enforcement Decree of the Corporate Tax Act;

[Plaintiff-Appellant] Plaintiff 1 and 1 other (Law Firm Domin, Attorneys Park Jae-young and 1 other, Counsel for plaintiff-appellant)

Co., Ltd. (Law Firm LLC et al., Counsel for the plaintiff-appellant)

Head of North Daegu Tax Office

Daegu High Court Decision 2015Nu7242 decided January 20, 2017

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined.

1. As to the assertion of inclusion of bad debts in deductible expenses

According to Article 19-2 (1) and (5) of the Corporate Tax Act and Article 19-2 (1) 8, (3) 1, and 2 of the Enforcement Decree of the Corporate Tax Act, the amount of bonds which cannot be recovered due to reasons prescribed by Presidential Decree, such as the debtor's bankruptcy, among bonds held by a domestic corporation (hereinafter "deductible expenses") shall be included in deductible expenses for the purpose of calculating the amount of income for the pertinent business year; and among such bonds, the period of inclusion in deductible expenses of "bonds which cannot be recovered due to debtor's bankruptcy, compulsory execution, execution of punishment, discontinuance of business, death, disappearance, or missing (hereinafter "unrepaid bonds")" is the business year which includes the date on which the relevant reason occurred and counted as deductible expenses. In cases of credit sales, etc., the period of inclusion in deductible expenses is determined as of the time of inclusion in deductible expenses for the business year which includes the date on which the relevant reason occurred. This is because the type of bad debts is not legally extinguished, and it is impossible to recover in light of the debtor's financial status, ability to pay.

However, Article 19-2(4) of the Enforcement Decree of the Corporate Tax Act provides that “If a corporation merges with another corporation, notwithstanding paragraph (3) 2, and a bad debt falling under paragraph (1) 8 is not appropriated as deductible expenses by the business year which includes the date of the registration of the merger, the bad debt shall be deemed deductible expenses of the business year which includes the date of the registration of the merger of the relevant corporation.” This purpose is to uniformly determine the time when a corporation performs expenses which are not appropriated as bad debt by the time of the merger regardless of whether the corporation is aware of tax accounting for the business year which includes the date of the registration of the merger. Therefore, even if the collection of the debt of the extinguished corporation was not made objectively and objectively determined as deductible expenses due to the discontinuation of the debtor’s business, even if it was not appropriated as deductible expenses for the business year which includes the date of the registration of the merger, such bad debt shall be deemed as deductible expenses for the business year which includes the date of the registration of the merger of the extinguished corporation under Article 19-2(4) of the Enforcement Decree of the Corporate Tax Act.

In light of the circumstances indicated in its holding, the court below was just in holding that C&C bank, a merged corporation, (hereinafter “C&C bank”), was unable to recover the claim of this case, which was held in relation to E&C development at the time of the merger of this case, and thus, it should be included in deductible expenses for the business year in which the merger registration of the merged corporation is registered pursuant to Article 19-2 (1) 8 and (4) of the Enforcement Decree of the Corporate Tax Act. In so doing, the court below did not err by misapprehending the legal principles on the interpretation and application of the above provisions,

2. As to the assertion of violation of the principle of trust protection

The lower court, based on its stated reasoning, determined that the tax authority cannot be deemed to have publicly expressed the view that “the impossibility of collecting the instant claim at the time of the instant merger was not objectively confirmed.”

Examining the record in light of the relevant legal principles, the lower court did not err by misapprehending the legal doctrine on the principle of trust protection, contrary to what is alleged in the grounds of appeal.

3. As to the justifiable grounds for exemption from penalty

The lower court rejected the Plaintiff’s assertion that the instant disposition of imposing the penalty tax was unlawful on the grounds that the Plaintiff was either aware or could have known that the instant claim had been treated as a bad debt due to C&C, which became final and conclusive at the time of the instant merger, and included it in deductible expenses as bad debt by accepting it from C&C bank.

Examining the record in light of the relevant legal principles, the lower court did not err in its judgment by misapprehending the legal doctrine on justifiable grounds for exempting penalty, contrary to what is alleged in the grounds of appeal.

4. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Ko Young-han (Presiding Justice)