[1] Validity of a case where a reduction loss is appropriated for a tangible fixed asset for business in accordance with the corporate accounting standards, and whether a corporation established through division succeeds to the amount remaining as a tax reservation in applying Article 85(3) of the former Enforcement Decree of the Corporate Tax Act (affirmative)

[2] In cases where Article 85(3) of the former Enforcement Decree of the Corporate Tax Act applies, whether the amount succeeded by the corporation established through division is already realized as losses in relation to the business of the divided corporation (negative)

[1] Articles 23(1), 23(4), and 49 of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008); Articles 32(1), 85(2)3, and 85(3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706 of Feb. 19, 2005; hereinafter “former Enforcement Decree of the Corporate Tax Act”); and the purpose of Article 85(2)3 and (3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706 of Feb. 19, 2005; hereinafter “former Enforcement Decree of the Corporate Tax Act”); if the recoverable value of fixed assets due to the deterioration of assets falls short of the book value, the depreciation costs shall be recognized as the deductible expenses if the domestic corporation appropriates the depreciation costs in accordance with the corporate accounting standards for the tangible fixed assets for business for which the market value falls rapidly due to the deterioration of assets.

In addition, Article 85(3) of the former Enforcement Decree of the Corporate Tax Act, which provides special provisions on the taxation deferment of division evaluation, intends to allow a corporation to take over the corporate accounting remaining in a divided corporation and the temporary tax adjustment between corporate accounting and the Corporate Tax Act when transferring the assets and liabilities that are included in the accounting book of a divided corporation at the book value. Thus, in applying Article 85(3) of the former Enforcement Decree of the Corporate Tax Act, where Article 85(3) of the former Enforcement Decree of the Corporate Tax Act is applied,

[2] In cases where Article 85(3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706, Feb. 19, 2005) applies, succession by a corporation established through division is limited to the amount remaining as a tax reservation of a divided corporation and the amount already realized as losses in relation to the business of a divided corporation is not included in the object of succession.

[1] Article 23(1) and (4) of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008; see current Article 23(5)); Article 49 (Elimination); Articles 32(1) and 85(2)3 and (3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706 of Feb. 19, 2005); Article 85(3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706 of Feb. 19, 2005);

Law Firm Barunck Co., Ltd. (Law Firm LLC, Attorneys So-young et al., Counsel for the defendant-appellant)

Head of Ulsan District Office

Supreme Court Decision 2011Du4855 Decided March 29, 2012

Busan High Court Decision 2012Nu1488 decided August 28, 2013

The judgment below is reversed, and the case is remanded to Busan High Court.

The grounds of appeal are examined.

1. Article 85 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706, Feb. 19, 2005; hereinafter “former Enforcement Decree of the Corporate Tax Act”) by delegation under Article 49 of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter “former Corporate Tax Act”) provides that “where a domestic corporation is divided, in principle, the amount that is not included in gross income or deductible expenses in relation to depreciation, appraisal under Article 42 of the Corporate Tax Act, and other tax adjustment shall not be succeeded to a corporation established by a domestic corporation” under Article 85(2)3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18706, Feb. 19, 2005; hereinafter “former Enforcement Decree of the Corporate Tax Act”) shall not be included in gross income or deductible expenses in the calculation of the income amount and tax base of a divided corporation for each business year, notwithstanding paragraph (2).”

Meanwhile, Article 23(1) of the former Corporate Tax Act provides that "The depreciation costs of fixed assets shall be included in the calculation of losses within the scope of the amount calculated under the conditions as prescribed by the Presidential Decree only where a domestic corporation appropriates them as losses for each business year (hereinafter "scope of depreciation"), and the portion of the appropriated amount in excess of the scope of depreciation out of the appropriated amount shall not be included in the calculation of losses," and Article 32(1) of the former Enforcement Decree of Corporate Tax Act pursuant to the delegation under Article 23(4) of the former Enforcement Decree of Corporate Tax Act provides that "the amount in excess of the scope of depreciation (hereinafter "approved depreciation amount") among the depreciation costs appropriated as losses for each business year by the corporation in the next business year shall be confirmed within the limit of the amount falling short of the scope of depreciation (hereinafter "approved shortfall"). In this case, where a corporation fails to appropriate the depreciation costs as losses, the disapproved depreciation amount shall be confirmed as losses within the limit of the scope of the scope of depreciation amount.

In light of the purport of each of the above provisions and the corporate accounting standards, if the recoverable value of tangible assets is less than the book value due to the deterioration of assets, etc., the difference is recognized as the cost, and the depreciation costs are distributed as reasonable costs throughout the service life of the assets, and its substance is similar to that, in case where a domestic corporation appropriates losses to a tangible fixed assets for business due to the deterioration of assets or the rapid fall in market value in accordance with corporate accounting standards, it shall be deemed that the depreciation costs are appropriated within the scope of the scope of the depreciation amount of the relevant business year, or confirmed as losses within the scope of the approved amount of the next business year. Furthermore, Article 85(3) of the former Enforcement Decree of the Corporate Tax Act, which provides special provisions on the special provisions on the deferment of the deferment of the division evaluation, intends to transfer the assets and liabilities remaining in the divided corporation and to enable the corporation to take over the assets and liabilities, which are the temporary difference between the corporate accounting books of the divided corporation and the Corporate Tax Act. Thus, where Article 85(3) of the former Enforcement Decree of the Corporate Tax Act applies, the amount of the corporation shall be retained as the amount of the corporation.

2. The lower court acknowledged the following facts: (a) the KFK Co., Ltd. (hereinafter “KFK”) was divided from Gohap Co., Ltd. (hereinafter “KFK”) and was established on December 28, 2001 (hereinafter “instant division”) and merged with the Plaintiff on December 27, 2012; (b) the KFK appropriated the difference between the book value and the recoverable value as to the tangible fixed assets for business as a result of the reduced loss; and (c) the KFK was managed as a tax reservation until December 31, 200 by appropriating the difference between the book value and the recoverable value as to the tangible fixed assets for business as a result of the instant division; and (d) the KFK acquired by succession as a tax reservation of KRW 151,246,262,765 (hereinafter “instant reduced amount”).

Based on such factual basis, the court below rejected all the Defendant’s assertion that: (a) the portion of the disposition imposing corporate tax for the pertinent business year 2001, 2002, which did not reflect the carried-over loss of the 2004 business year 204 business year 2004 business year 2004 business year 2004 business year ; (b) the corporation succeeded to the assets at the market price, and thus, did not fall under the category of the succession of the knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knife knif.

3. A. Of the judgment of the court below, the part that deemed that the instant reduced loss amount appropriated by the divided corporation as a tangible asset reduction loss is appropriated as depreciation costs and thus, the case is subject to succession to the KS, which is a corporation established by division, is justifiable in accordance with the aforementioned legal principles. In so doing, it did not err by misapprehending the legal principles on the subject of succession to the corporation established by division under Article 85(3) of the former Enforcement Decree of the Corporate Tax

B. However, we cannot agree with the judgment of the court below which held that the KPK shall succeed to the whole amount of the reduced loss in this case for the following reasons.

In cases where Article 85(3) of the former Enforcement Decree of the Corporate Tax Act applies, succession by a corporation established through division is limited to the remaining amount due to tax reservation of a divided corporation and the amount realized as losses in relation to the business of a divided corporation is not subject to succession. However, as seen earlier, Article 32(1) of the former Enforcement Decree of the Corporate Tax Act provides that the disapproved depreciation amount shall be ratified as losses even where a corporation does not appropriate depreciation costs as losses. Article 32(5) of the former Enforcement Decree of the Corporate Tax Act provides that where depreciable assets are transferred during a business year, the disapproved depreciation amount of the relevant assets shall be included in the deductible expenses for the business year to which the date of transfer belongs. As such, the amount equivalent to the period used for the fixed agreed business among the reduced losses in this case should be confirmed as losses even if the total amount, which is a divided corporation, is managed as a tax reservation without appropriating them as losses

Therefore, the court below calculated the scope of depreciation that can be succeeded to by the KFK pursuant to Article 26(9) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17457 of Dec. 31, 2001), and determined that only the amount can be confirmed as losses of the KFK within the scope of the approved approval. The court below rejected the defendant's assertion that the KFK succeeds to the entire amount of the reduced amount and should exclude the amount equivalent to the period during which the KFK owned in the aggregate. This determination is erroneous by misapprehending the legal principles on the scope of the tax adjustment items succeeded to due to the division under Article 85(3) of the former Enforcement Decree of the Corporate Tax Act.

4. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Poe-young (Presiding Justice)