Where a corporation that carries on the apartment sale business falling under the pre-sale sale constructs apartment houses by contract for all or part of the construction work with the contractor, the meaning of "the total construction cost accumulated by the end of the relevant business year" and the method of calculating construction cost to be included therein, which is the subcommittee in the formula of work progress rate prescribed in Article 34(1) of the former Enforcement Rule of the Corporate Tax Act (=the contract

In full view of the legislative intent of Article 69(2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20720 of Feb. 29, 2008) and Article 34(1) and (2) of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 547 of Mar. 30, 2007; hereinafter “Enforcement Rule”) to prevent distortion of the profits and losses during the period by allocating profits and losses in line with the language and contents of the former Enforcement Rule and the degree of the progress of construction, etc., “the total construction cost amount incurred by the end of the pertinent business year”, which is a pro rata of the work progress formula in Article 34(1) of the Enforcement Rule, refers to the cumulative total construction cost actually input for construction of the object by the end of the pertinent business year, and it does not mean that the construction work is completed by contracting all

Therefore, where a corporation that carries on the apartment sales business falling under the pre-contract sales constructs apartment buildings by contract for all or part of the construction work to the contractor, the construction cost to be included in the "the aggregate total construction cost incurred by the end of the relevant business year", which is a molecular formula in the work progress ratio in relation to the contract for the construction work, is not the construction cost for which the obligation to pay according to the contract for construction has become final and conclusive, but the construction cost actually incurred by the corporation

Article 69(2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20720 of Feb. 29, 2008); Article 34(1) and (2) of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 547 of Mar. 30, 2007) (see current Article 34(3))

Seoul High Court Decision 201Na1448 delivered on August 1, 2011

The director of Busan District Office

Busan High Court Decision 2010Nu3893 decided June 1, 2011

The additional tax portion among the judgment of the court below is reversed, and that part of the case is remanded to Busan High Court. The remaining appeals are dismissed.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Regarding ground of appeal No. 1

A. The main sentence of Article 69(2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20720, Feb. 29, 2008; hereinafter “Enforcement Decree”) provides that where the contract period for construction, manufacturing, and other services (including contracting and reservation sales; hereinafter “construction”) is not less than one year, earnings and losses for each business year from the business year which includes the date of the commencement of construction of the object to the business year which includes the date of its delivery shall be included in the calculation of earnings and losses for the relevant business year based on the construction completion rate as prescribed by the Ordinance of the Ministry of Finance and Economy (hereinafter “work progress rate”), and Article 34 of the former Enforcement Rule of the Corporate Tax Act (amended by the Ordinance of the Ministry of Finance and Economy No. 547, Mar. 30, 2007; hereinafter “Enforcement Rule”) shall be calculated by deducting the total construction progress from the total amount generated by the end of the relevant business year ± total construction period from the total construction progress formula (hereinafter “construction progress rate”).

In full view of the legislative intent of preventing the distortion of profits and losses by allocating profits and losses in line with the language and text of these regulations, “the cumulative total construction cost incurred by the end of the pertinent business year”, which is the molecular of the instant formula, refers to the cumulative total construction cost actually incurred for the construction of the object by the end of the pertinent business year, and it does not mean any different cases where the construction of an object is completed by contracting all or part of the construction work to a third party. Therefore, in cases where a corporation operating an apartment sales business, which is a pre-sale sales, constructs an apartment by contract for all or part of the construction work, the construction cost to be included in “the cumulative total construction cost incurred by the end of the pertinent business year,” which is the molecular of the instant formula, in relation to the contract, is not the construction cost for which the obligation to pay has become final and conclusive according to the contract, but rather the construction cost actually incurred by the corporation

B. Based on the adopted evidence, the court below acknowledged the following facts: (a) the Plaintiff’s contract for the construction work of the apartment in this case was awarded to the Daewoo Construction Co., Ltd. (hereinafter “Treatment Construction”); and (b) the Plaintiff reported the corporate tax base and tax amount on the basis of the rate of work progress calculated by deeming the total construction cost incurred by the end of the pertinent business year as the amount of “the total construction cost incurred by the end of the pertinent business year” as the amount of “the total construction cost incurred by the end of the pertinent business year,” which is the molecular in the instant formula; and (c) based on the Defendant’s calculation of the rate of work progress related to the apartment in this case’s apartment sales business in this case as “the construction cost claimed by the treatment construction in accordance with the terms of the contract payment,” not “the construction cost claimed by the treatment construction in accordance with the terms of the construction cost payment under the

C. In light of the aforementioned legal principles and records, we affirm the judgment of the court below as just, and there is no error in the misapprehension of legal principles as to the period of attribution of gross income and deductible expenses or the rate of work progress, contrary to what is alleged in the grounds of appeal.

2. Regarding ground of appeal No. 2

A. Under the tax law, where a taxpayer violates various obligations, such as a return and tax payment, without justifiable grounds, in order to facilitate the exercise of the right to impose taxes and the realization of a tax claim, the taxpayer’s intent or negligence is not considered, but the taxpayer’s intentional intent or negligence is not considered. However, where there is a circumstance that the taxpayer cannot be deemed to have been aware of his/her obligations, or where there is a reason that it is unreasonable for the taxpayer to expect the fulfillment of his/her obligations to the party concerned, etc. (see Supreme Court Decision 2003Du13632, Jan. 27, 2005, etc.).

B. The reasoning of the lower judgment and the evidence duly admitted by the lower court reveal the following: (a) Daewoo Construction did not inform the executing company of the progress rate on the ground that it was a “trade secret” while performing construction works under a contract from the executor of the apartment sale business, such as the Plaintiff; and (b) accordingly, there was no way to know the progress rate of the instant apartment construction works; and (c) the progress rate was different from the progress rate in the supervision report on the instant apartment construction works prepared in accordance with relevant Acts and subordinate statutes, such as Article 24 of the former Housing Act (amended by Act No. 7334, Jan. 8, 2005) which was enforced at the time.

In addition to these circumstances, the Enforcement Rule of the Corporate Tax Act, amended by Ordinance of the Ministry of Finance and Economy No. 547 of March 30, 2007, newly established the proviso of Article 34(1)1, provides that the work progress rate may be calculated even based on the “ratio of work hours, work days, or the size or quantity of work period or work period, etc., which is already invested or completed.” This also appears to have taken into account the fact that, if an object is constructed through a contract with a third party as the Plaintiff, it is difficult to understand the actual cost incurred in the construction, etc., and the fact that the total sales revenue reported by the Plaintiff in relation to the apartment sales business of this case does not differ from the investigation by the Defendant, but only part of the transfer period is different in light of the above legal principles, it is reasonable to deem that there was a justifiable reason that the Plaintiff could not be attributable to the Plaintiff’s negligence in performing its duties even if the Plaintiff neglected its duties by underreporting the corporate tax base, etc.

C. Nevertheless, on the grounds that it is possible for the Plaintiff to reasonably grasp the rate of work progress of Daewoo Construction, the lower court determined that there was a justifiable ground that could not be attributable to the Plaintiff’s failure to perform his/her duty underreporting and underpayment of corporate tax. In so doing, the lower court erred by misapprehending the legal doctrine on “justifiable ground” which is the grounds for exemption from the imposition of additional tax, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of

3. Conclusion

Therefore, the part of the judgment of the court below is reversed, and that part of the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Lee In-bok (Presiding Justice)