Plaintiff 1 and one other (Law Firm Amos, Attorneys Kang Dong-ho et al., Counsel for the plaintiff-appellant)

Head of Central Tax Office

September 1, 2016

Suwon District Court Decision 2013Gudan1106 Decided April 29, 2016

1. Revocation of a judgment of the first instance;

2. All plaintiffs' claims are dismissed.

3. The costs of the lawsuit are assessed against the Plaintiffs.

1. Purport of claim

The Defendant’s disposition rejecting refund of KRW 15,052,238, special rural development tax for the year 208, KRW 334,495, and KRW 46,758,772, and special rural development tax for the year 2008 against Plaintiff 1 on June 25, 2012 is revoked.

2. Purport of appeal

The same shall apply to the order.

1. Details of the disposition;

A. Overcheon-si ( Address omitted) and two parcels owned by the Plaintiffs (hereinafter in this case’s land) were located in the natural green area, which is the initial development restriction zone, but were selected as the first cancellation zone with priority in the mid-scale fall, and the development restriction zone was rescinded by the Gyeonggi-do Notice No. 2005-159 on May 30, 2005 and changed to the first general residential area.

B. After that, the instant land was incorporated into the “GB Preferential Cancellation Project within the GB,” and the compensation consultation under the Act on the Acquisition of Land, etc. for Public Works and the Compensation Therefor was conducted on May 2007 according to the notification of the compensation plan and the notification of the public notification of the Overcheon City’s compensation plan. In the course of the compensation consultation, the Sincheon City deemed that the instant land was released from the development restriction zone and the alteration to the Class I general residential area for the purpose of the instant parking lot expansion project directly, and did not consider this as having been conducted for the purpose of the instant parking lot expansion project, and presented KRW 187,351,302, and KRW 589,716 to the Plaintiff 1 as the compensation calculated by evaluating the value of the instant land based on the conditions before the development restriction zone was cancelled. The Plaintiffs accepted the said compensation presented by the Plaintiff, and agreed to purchase it on May 26, 2008 and June 13, 2008, Plaintiff 2008.

C. However, in the adjudication of expropriation of the land adjacent to the instant land, the compensation amount of KRW 2,430,00 per square meter is assessed on the basis of the condition that the development restriction zone was cancelled, and the landowner who responded to the said consultation, including the Plaintiffs, filed a lawsuit seeking restitution of unjust enrichment against Sucheon-si on July 31, 2009, Suwon District Court Ansan-si 2009Gahap5259. On February 16, 2008, on the ground that the above consultation was lawfully cancelled due to the plaintiffs' declaration of intent of cancellation on the ground that it was impossible to return the original part of the instant land to the plaintiffs, and thus, the remaining portion of the compensation amount calculated by deducting the amount equivalent to the above part from the compensation amount already paid to the plaintiffs from the market value of the said part of the instant land (the remaining part of the compensation amount of KRW 187,351,302,2581,979).

D. On March 7, 2009, the Plaintiffs appointed the Nonparty’s attorney-at-law as his/her attorney on March 7, 2009. On February 24, 2012, the Plaintiffs received the said additional compensation pursuant to the judgment of the first instance on February 24, 2012, and on March 5, 2012, the Plaintiffs paid the said attorney-at-law KRW 58,000,000 as the retainer fee and the contingent fee, and Plaintiff 2 paid KRW 182,00,000 to the said attorney-at-law (hereinafter “instant litigation costs”).

E. On March 2012, the Plaintiffs filed a revised return on the capital gains tax in 2008, which was already reported including the above additional compensation in the transfer value, and on April 25, 2012, the Plaintiffs rejected the Defendant’s claim on the ground that “The instant litigation cost cannot be deemed a direct cost paid to transfer the assets” (hereinafter “instant disposition”). On April 25, 2012, Plaintiff 1 deducted the instant litigation cost from the necessary expenses, and Plaintiff 1 did not request refund of KRW 15,052,238, special rural development tax, and special rural development tax for the year 2008, KRW 46,758,72, and special rural development tax for the year 2008, and KRW 1,039,084, respectively.

F. The Plaintiffs were dissatisfied with the instant disposition and filed a request for examination with the Commissioner of the National Tax Service on July 17, 2012, but the said request was dismissed on September 18, 2012.

G. Meanwhile, in the appellate court of the first instance lawsuit (Seoul High Court 2012Na30320), on April 8, 2014, the lower court rendered a decision as a substitute for conciliation, such as “The payment of KRW 269,97,726 to Plaintiff 1 and KRW 838,723,294 to Plaintiff 2,” and the said decision became final and conclusive around that time.

[Ground of recognition] Gap evidence Nos. 1, 2, 9, Gap evidence Nos. 3 through 8-1, 2-2, and the purport of the whole pleadings

2. Whether the disposition is lawful;

A. The plaintiffs' assertion

The instant litigation costs constitute “expenses directly disbursed for the transfer of assets” as necessary expenses under Article 97(1)4 of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same shall apply) and Article 163(5)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21301, Feb. 4, 2009; hereinafter the same shall apply), which was in force at the time of the transfer of the instant land as the expenses incurred in relation to the increase of compensation for the instant land. Accordingly, the instant disposition that did not recognize the instant litigation costs as necessary expenses is unlawful.

B. Relevant statutes

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

C. Determination

1) The instant litigation cost is deemed to have been paid by the Plaintiffs to secure their maximum compensation in the course of the purchase or expropriation of the instant land owned by the Plaintiffs. However, Article 163(3)2-2 of the Enforcement Decree of the Income Tax Act amended by Presidential Decree No. 26067, Feb. 3, 2015, “where land, etc. is purchased through consultation or expropriated pursuant to the Act on Acquisition of and Compensation for Land, etc. for Public Works Projects or other Acts and subordinate statutes, the amount excluding that included in necessary expenses in calculating the amount of income for the fiscal year in which the compensation was paid.” In light of the fact that the instant litigation cost is similar to that prescribed as one of the capital expenses, etc. in the said newly established provisions, it is reasonable to view that the instant litigation cost has the nature of “capital expenditure, etc.” under Article 97(1)2 of the Income Tax Act, and it cannot be deemed that it directly falls under the transfer cost prescribed in Article 97(1)4 of the former Enforcement Decree of the Income Tax Act, etc.

2) As to the reasons for the instant disposition, the Plaintiffs asserted that the “court costs incurred in relation to the increase in real estate expropriation compensation” is not listed in each item of Article 163(5)1 of the Enforcement Decree of the Income Tax Act amended by Presidential Decree No. 21301, Feb. 4, 2009, which was after the time of transfer of the instant land. The instant disposition is unlawful against the principle of retroactive taxation prohibition.

However, as long as the litigation costs of this case cannot be deemed as "expenses directly disbursed to transfer assets" as necessary expenses under Article 97 (1) 4 of the former Income Tax Act and Article 163 (5) 1 of the former Enforcement Decree of the Income Tax Act, the disposition of this case cannot be deemed as unlawful against the principle of prohibition of retroactive taxation even if the defendant alleged as above.

3. Conclusion

Therefore, the plaintiffs' claims in this case are all dismissed due to the lack of merit, and the judgment of the court of first instance is unfair with different conclusions. Thus, the defendant's appeal is accepted and the judgment of the court of first instance is revoked and all of the plaintiffs' claims are dismissed as per Disposition

[Attachment]

Judges Cho Jong-sung (Presiding Judge)