[1] Meaning of “Fraud and other unlawful act” under Article 26-2(1)1 of the former Framework Act on National Taxes, and whether the act of failing to report under tax law or making a false report constitutes such act (negative)

[2] Where an act of obtaining income through a disguised name constitutes "Fraud or other unlawful act" under Article 26-2 (1) 1 of the former Framework Act on National Taxes

[1] Article 26-2(1) of the former Framework Act on National Taxes (amended by Act No. 9263, Dec. 26, 2008; hereinafter the same) provides that in principle, five years of exclusion period of national taxes shall be set (No. 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 (No. 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 an unlawful act, such as making it difficult to discover the fact of taxation requirements on national taxes while 5 years are imposed, or making it difficult to detect the fact of taxation requirements on national taxes, and making it difficult to expect the exercise of the imposition right because it is difficult for the tax authority to find out the omission report. Therefore, the “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 taxes, and it does not constitute a mere failure to report under the tax law or making a false report without accompanying any other act.

[2] Even if income is obtained through a disguised name but it is not related to the evasion of tax, if it is an act without any connection with 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. 9263 of Dec. 26, 2008). However, if it 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, which makes it impossible or considerably difficult to impose and collect taxes.

[1] Article 26-2(1)1 of the former Framework Act on National Taxes (Amended by Act No. 9263, Dec. 26, 2008; see current Article 26-2(2)2); 3 (see current Article 26-2(1)) / [2] Article 26-2(1)1 of the former Framework Act on National Taxes (Amended by Act No. 9263, Dec. 26, 2008; see current Article 26-2(2)2)

[1] Supreme Court Decision 2013Du7667 Decided December 12, 2013 (Gong2014Sang, 196)

Plaintiff (Attorney Ba-man et al., Counsel for the plaintiff-appellant)

Korea

Seoul High Court Decision 2018Na2038650 decided November 20, 2019

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

The grounds of appeal are examined.

1. Article 26-2(1) of the former Framework Act on National Taxes (amended by Act No. 9263, Dec. 26, 2008; hereinafter the same) provides that in principle, five years of exclusion period of national taxes shall be set (No. 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 (No. 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 an unlawful act, such as making it difficult to discover the fact of taxation requirements on national taxes while 5 years are imposed, or making it difficult to detect the fact of taxation requirements on national taxes, and making it difficult to expect the exercise of the imposition right because it is difficult for the tax authority to find out the omission report. Therefore, the “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 taxes, and it does not constitute a mere failure to report under the tax law or making a false report without accompanying any other act.

Meanwhile, even if income is obtained through a disguised name, if it is not related to tax evasion, 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 the nominal name comes from the purpose of tax avoidance, such as the evasion of progressive tax rates, the distribution of revenue, the application of special cases on reduction and exemption, and the use of the name of the insolvent person who does not pay taxes, etc. Furthermore, if active acts such as the preparation of a false sales contract and the false payment of the purchase price, false return of capital gains tax, false registration, false registration, preparation and keeping of a false account book, etc. are added, such act constitutes “Fraud or other unlawful act” which makes it impossible or considerably difficult to impose and collect taxes (see Supreme Court Decision 2013Du7667, Dec. 12, 2013, etc.).

2. The lower court, on the grounds indicated in its reasoning, determined that the period of exclusion of five years under Article 26-2(1)1 of the former Framework Act on National Taxes should be applied to global income tax on deemed dividend income of this case, not the ten-year exclusion period under Article 26-2(1)3, on the grounds that it is difficult to recognize that the Plaintiff committed an active act other than the name of the Nonparty solely based on the circumstance asserted by the Defendant.

In light of the aforementioned legal principles and the record, the lower court did not err in its judgment by misapprehending the legal doctrine as to “Fraud and other unlawful acts” under Article 26-2(1)1 of the former Framework Act on National Taxes, or by failing to exhaust all necessary deliberations as to the reversion of income from omission.

3. 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 Kwon Soon-il (Presiding Justice)