Whether a claim on a check or note which has passed six months or more from the date on which the default occurred can be included in necessary expenses as bad debt (affirmative with qualification)

In full view of the provisions of Article 27(1) and (3) of the Income Tax Act, Article 5(1)16 and (2) of the Enforcement Decree of the same Act, and Article 25(1) of the Enforcement Rule of the same Act, in calculating business income, bad debt corresponding to necessary expenses may be classified into cases where the relevant credit has been legally extinguished or has not legally extinguished, but where the relevant credit has not been recovered in light of the debtor's asset status and payment ability, etc., and it constitutes bad debt on the check or bill, which has been 6 months or more from the date of the bankruptcy. Since the former is naturally impossible to recover, it shall be included in the necessary expenses for the taxable year including the date of the extinction of accounting as bad debt. Since the former is included in the necessary expenses for the taxable year including the date of the extinction of accounting as bad debt, the latter exists, so it may be included in the necessary expenses for the relevant taxable year only when the business operator counted in the necessary expenses in the book that the bad debt occurred clearly due to impossibility

Article 27 (1) and (3) of the Income Tax Act, Article 55 (1) 16 and (2) of the Enforcement Decree of the Income Tax Act, Article 25 (1) of the Enforcement Rule of the Income Tax Act

Plaintiff

Head of Geumcheon Tax Office

Seoul High Court Decision 2004Nu11956 delivered on June 1, 2005

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

The grounds of appeal are examined.

1. In full view of the provisions of Article 27(1) and (3) of the Income Tax Act, Article 5(1)16 and (2) of the Enforcement Decree of the same Act, and Article 25(1) of the Enforcement Rule of the same Act, when calculating business income, bad debt equivalent to necessary expenses can be classified into cases where the relevant claim is legally extinguished and is not legally extinguished, but where, in light of the debtor's asset situation and payment ability, etc., it is impossible to recover the existence of assets. The former constitutes bad debt on a check or note, which has been 6 months or more from the date of the default. Since the former is naturally impossible to recover, it shall be counted as bad debt in the necessary expenses for the taxable year including the date on which the business operator ceased to dispose of the accounts as bad debt. Since the latter exists, the latter may be counted as necessary expenses for the relevant taxable year only when the business operator counted as necessary expenses in the account clearly in the account that bad debt occurred.

In light of the aforementioned legal principles and records, the court below recognized that the claims on checks and bills for which six months or more have passed since the date on which the plaintiff failed to pay for bad debts were not appropriated as necessary expenses for the pertinent taxable year, and determined that the above fact-finding and decision of the court below are just and acceptable, and there were no errors in the misapprehension of legal principles as to inclusion of bad debts in necessary expenses, as otherwise alleged in the ground of appeal.

2. The plaintiff's claims on the non-performing checks and bills do not constitute bad debts. According to the evidence duly admitted by the court below, the plaintiff failed to submit account books and documentary evidence concerning necessary expenses for the price business in addition to his asserted bad debts. In this case, in calculating the tax base, it is possible to determine the amount of income by estimation because there are no necessary account books or documentary evidence in the calculation of the tax base, or important parts are incomplete or false. Thus, the court below's determination that the defendant's measures calculated by applying the standard income rate as the estimation investigation decision is legitimate, and there is no error of law in the misapprehension

3. Therefore, the appeal is dismissed. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Ill-sook (Presiding Justice)