National Agricultural Cooperative Federation (Attorney Kim Jong-soo et al., Counsel for the plaintiff-appellant)

The director of the Nam-gu Tax Office (Law Firm Chungcheong, Attorney Cho Jong-chul, Counsel for the plaintiff-appellant)

June 17, 2009

Seoul Administrative Court Decision 2007Guhap18048 Decided September 24, 2008

1. All appeals filed by the plaintiff and the defendant are dismissed.

2. The costs of appeal shall be borne by each party.

1. Purport of claim

The defendant's decision on September 1, 2004 (the plaintiff's decision on September 8, 2004 seems to be erroneous) against the plaintiff; ① the part exceeding 604,51,282 won out of the disposition imposing corporate tax belonging to the business year 1999; ② the part exceeding 36,106,871,737 won of the disposition imposing corporate tax belonging to the business year 2000 (from July 1, 200 to December 31, 200); ③ the part exceeding 15,095,460,631 won of the disposition imposing corporate tax belonging to the business year 27,19,511,769 won of the corporate tax belonging to the business year 201; ③ the part exceeding 14,787,375,529; and ④ the part of the disposition imposing corporate tax belonging to the plaintiff in excess of 36,106,368,4688,297,284,208

2. Purport of appeal

A. The plaintiff

The part of the judgment of the court of first instance against the plaintiff shall be revoked, and the part of the corporate tax belonging to the plaintiff on September 1, 2004 (from July 1, 2000 to December 31, 200) 36,106,878,230,575 won, among the disposition of imposition of 17,578,230,577 won, and 27,119,511,769 won, among the disposition of imposition of 9,251,91,93,576 won, shall be revoked, and the part of the disposition of imposition of 9,251,93,576 won, among the disposition of imposition of 250,817,806,142 won, which reverts to the plaintiff for the business year 2002, which exceeds 248,349,686,182 won shall be revoked.

B. Defendant

The part against the defendant in the judgment of the first instance shall be revoked, and the plaintiff's claim corresponding to the revoked part shall be dismissed.

1. A part citing a judgment of the first instance;

The reasoning for the court's explanation on this case is as stated in Paragraph 2 of Article 12 of the judgment of the court of first instance, with the exception of adding a judgment on the plaintiff's argument, and adding a "manner 4, 5, 17, 19, 21, 26, 9, 18, 27, 27, 12, 12, 12, 17, 19, 21, 26, 18, 27, 27, 27, 26, 26, 27, 26, 26, 27, 26, 26, 27, 26, 26, 27, 26, 26, 3

2. Additional determination

A. As to the allowance for bad debts

(1) Summary of the Plaintiff’s assertion

For the following reasons, the Plaintiff asserts that even if the allowance for bad debts is not established for claims such as the State, etc., for which it is possible to choose whether to set up the allowance for bad debts at the time of settlement of accounts, the Plaintiff may choose 2% of the amount of the allowance for bad debts or 2% of the amount of the credit balance or the most favorable standard among the regulations on the supervision of banking business, and that the portion of the imposition of the

(A) Article 34(1) of the Corporate Tax Act provides that “where a domestic corporation appropriates allowances for bad debts as losses in order to cover bad debts of credit account receivable, loans, or other corresponding claims during each business year, the allowances for bad debts shall be included in deductible expenses within the scope of the amount calculated as prescribed by Presidential Decree in calculating the income amount for the business year concerned.” It does not provide that a financial institution may not choose any other method when it selects the method of accumulating allowances

(B) According to Article 34(1) of the Corporate Tax Act, it can be known that whether the settlement adjustment item has been appropriated at the time of settlement of accounts should be determined by item of specific deductible expenses. Thus, if the allowance item for bad debt has been appropriated at the time of settlement of accounts, it is not necessary to determine whether individual claims are included in the appropriation of bad debt

(C) According to the Defendant’s assertion, a financial institution which is obliged to set up allowance for bad debts pursuant to the Banking Business Supervision Regulations shall at all times calculate the maximum amount of the allowance for bad debts in accordance with the method under the Banking Business Supervision Regulations. Article 61(2) of the Enforcement Decree of the Corporate Tax Act provides that a financial institution may apply the standard of 2% of the balance of debentures or the ratio of bad debts to the calculation of the maximum amount of the allowance

(D) Even in the form of reporting allowance for bad debts (attached Form 34 of the Enforcement Rule of the Corporate Tax Act), if a financial institution applies the ratio under the Regulations on Supervision of Banking Business, it shall select and report the ratio, 2% of the balance of debentures, and the ratio of bad debts, whichever is larger.

(E) Since each classified asset according to the asset soundness classification result and the claims of the State, etc. are not different in nature from the risk of bad debt, claims of the State, etc. can be used to set aside allowances for bad debt and set limits for bad debt.

(f) The choice of another method in which a financial institution selects the criteria to accumulate the allowance for bad debts at the time of the settlement of accounts and then calculates the limits of the allowance for bad debts in calculating the limits of the allowance for bad debts is irrelevant to tax avoidance.

(G) (a) The instant allowance for bad debts, even if the inclusion in deductible expenses for the pertinent business year is not recognized, has no problem in the inclusion of the deductible expenses in the following business year, and there is no difference in the Plaintiff’s total deductible expenses and there is only difference in the inclusion of the deductible expenses, and there is no clear precedent regarding the instant allowance for bad debts in each business year. In light of the fact that it is unreasonable to expect the Plaintiff to fulfill the obligation to pay the portion of the allowance for bad debts in the disposition imposing corporate tax for each business year, there is a justifiable reason that it is unreasonable to expect the Plaintiff to do so

(2) Determination

However, the Plaintiff’s above assertion is difficult to accept for the following reasons.

(A) Under Article 34(1) of the Corporate Tax Act, Article 34(1) does not stipulate that a financial institution may not choose any other method when it selects the accumulation method of the reserve for bad debts, but does not stipulate that it may choose any other method when it selects the accumulation method of the reserve for bad debts after choosing the accumulation method of the reserve for bad debts.

(B) Article 34(1) of the Corporate Tax Act provides that "where a domestic corporation appropriates allowances for bad debts as losses in order to cover bad debts of credit sales, loans, or other corresponding claims in each business year, the allowances for bad debts shall be included in deductible expenses within the scope of the amount calculated as prescribed by Presidential Decree in calculating the income amount for the business year concerned, within the scope of the amount calculated as prescribed by Presidential Decree." Thus, if allowances for bad debts are included in the expenses at the time of settlement of accounts, it is not necessary to determine

(C) Under the premise that a financial institution should always set up a allowance for bad debts in accordance with the banking business supervision regulations, the Plaintiff’s assertion that a financial institution should always calculate the maximum amount of the allowance for bad debts in accordance with the banking business supervision regulations, notwithstanding the provisions of Article 61(2) of the Enforcement Decree of the Corporate Tax Act, so there is no ground to conclude that a financial institution should always set up a allowance for bad debts in accordance with the banking business supervision regulations. However, in the 8th page of the preparatory documents of May 26, 2009 submitted by the Plaintiff at the trial, the Plaintiff states that “a financial institution arbitrarily set the method of accounting for bad debts as well as for bad debts, such as the rate of bad debts or 2/100 of the balance of debentures,” and “a financial institution shall choose the method of accumulating the allowance for bad debts.”

(D) It is insufficient to recognize the Plaintiff’s assertion that the portion of the disposition imposing corporate tax for each business year of this case on the allowance for bad debts is unlawful solely based on the contents indicated in the report form for

(E) The purport that the accumulation rate vary according to the asset soundness classification result in the accumulation of bad debt allowances is to reasonably cope with the occurrence of the future bad debt by applying the accumulation rate of respective bad debt to each claim with different bad debt risk, and to reasonably cope with the occurrence of the future bad debt by applying the accumulation rate of bad debt corresponding thereto to each claim with different bad debt risk. In addition, the provision that the State and other claims, such as the State, etc. may not accumulate bad debt allowances is due to the fact that the borrower's claims such as the government, local governments, financial institutions, etc. are close to dangerous assets with little bad debt risk. Thus, it can be known that each classified asset according to the asset soundness classification result and claims such as the State, etc. are different in nature from bad debt risk, and therefore, claims such as the State, etc. can not be used for accumulation of bad debt allowances and setting the limits of bad debt allowances. If it is interpreted differently, it would result in unreasonable results that the State and other claims such as the State, etc.

(F) If a business performance is improved by exercising an option that does not set up allowances for bad debts on claims such as the State, etc., it is reasonable to pay taxes accordingly, however, it is likely that it would be a means of tax avoidance to include bonds such as the State when calculating the limits of allowances for bad debts after exercising a option that does not set up allowances for bad debts on claims such as the State, etc.

(G) In order to facilitate the exercise of taxation rights and the realization of tax claims, additional tax under tax law is an administrative sanction imposed in accordance with the law in cases where a taxpayer violates a return, tax liability, etc. as prescribed by the law without justifiable grounds, and the taxpayer’s intention or negligence is not considered as a justifiable ground (see Supreme Court Decision 98Du3532 delivered on December 28, 199, etc.). However, if there is a justifiable reason that it is unreasonable for a taxpayer to be unaware of his/her obligation because it can not be said that the taxpayer did not know of his/her obligation, or that it is unreasonable for him/her to expect the fulfillment of his/her obligation, it may be exempted from imposition (see Supreme Court Decision 2001Du7886 delivered on January 10, 2003, etc.).

Even if all of the circumstances in the instant case are acknowledged, it is not sufficient to acknowledge that such circumstances alone constitute a case where there are justifiable grounds for not misunderstanding the duty to pay for bad debts in the disposition imposing corporate tax on each business year of the instant case, such as where it is unreasonable to expect the Plaintiff to fulfill the obligation to pay for bad debts in the disposition imposing corporate tax on each business year of the instant case, and there is no other evidence to prove otherwise.

B. Regarding the revaluation of assets

(1) Summary of the Plaintiff’s assertion

For the following reasons, the Plaintiff asserts that the assets revaluation marginal profit cannot be included in the gross income of the non-profit corporation, such as the Plaintiff, and on different premise, the part of the disposition imposing corporate tax for each business year of this case is unlawful.

(A) Article 3(2) of the former Corporate Tax Act (amended by Act No. 6558, Dec. 31, 2001; hereinafter “former Corporate Tax Act”) provides that “The income of a non-profit domestic corporation for each business year shall be the income derived from the business or revenue falling under any of the following subparagraphs with respect to the income of a non-profit domestic corporation.” Article 15(1) of the same Act provides that “The income shall be the amount of the income arising from the transactions that increase the net assets of the corporation concerned except for the payment of capital or financing and the transactions that are provided in this Act.” In comparison with each of the above provisions, in the case of a non-profit corporation, it can be known that only the income specified in Article 3(2) of the same Act is taxable income, and there is no asset revaluation marginal profit provided for in subparagraphs 1 through 6

(B) As seen earlier, a non-profit corporation does not have any provision in the calculation of earnings from the revaluation of assets from the beginning, and thus, Articles 18 subparag. 1, 39, and 42(1)1 of the former Corporate Tax Act, which are exceptions to the exclusion from gross income, and Articles 13(1)1 and 33(1) proviso of the Assets Revaluation Act, which are exceptions to the exclusion from gross income, do not apply to the non-profit corporation, and each of the above provisions shall be deemed to apply only to profit-making corporations.

(C) Article 28(1) of the Assets Revaluation Act provides, “If a corporation conducts revaluation, the revaluation shall accumulate, as revaluation reserve, the balance remaining after deducting losses carried forward on the balance sheet before the revaluation date, one day prior to the revaluation date, as revaluation reserve.” Article 28(2) of the Assets Revaluation Act provides, “The revaluation reserve shall not be disposed of except for the cases falling under a offsetting between the amount in the exchange rate adjustment account and the amount in the balance sheet, which occurred after the revaluation date, and the amount in the exchange rate adjustment account.” Such nature of revaluation reserve has the same nature as the capital surplus excluded from the subject of corporate tax

(2) Determination

However, the Plaintiff’s above assertion is difficult to accept for the following reasons.

(A) Article 1 subparagraph 1 A of the former Corporate Tax Act provides that "a domestic corporation" means a corporation with its head office or principal office in the Republic of Korea, and Article 1 subparagraph 2 (a) of the same Article provides that "a non-profit domestic corporation" means a corporation falling under any of the following items among the domestic corporations, and where no "non-profit domestic corporation" is stipulated in the legal text, "domestic corporation" shall be deemed to include both a profit-making corporation and a non-profit corporation. Since Articles 18 subparagraph 1, 39, and 42 (1) 1 of the same Act provide that "non-profit domestic corporation" shall be deemed to include both a profit-making corporation and a non-profit corporation, it shall not be deemed that the provisions and the proviso to Article 13 (1) 1 and Article 33 (1) of the Assets Revaluation Act related to each of the above provisions apply only to profit-making corporations

In addition, the proviso of Article 33(1) of the Assets Revaluation Act provides that "the difference in the revaluation of land under the provisions of Article 13(1)1 shall be included in the gross income in calculating the income amount under the Corporate Tax Act." In addition, in full view of the provisions of Article 18 subparag. 1, Article 39, and Article 42(1)1 of the former Corporate Tax Act and Article 13(1)1 of the Assets Revaluation Act, in the case of non-profit corporations, it is difficult to view that there is no provision in the calculation of the asset revaluation marginal profit at the beginning.

(B) Therefore, Article 3(2) of the former Corporate Tax Act provides, “The income accrued from the business or revenue falling under any of the following subparagraphs with respect to the income of a non-profit domestic corporation for each business year,” and even if the same does not stipulate any asset revaluation marginal profit under Article 18 subparag. 1, 39, and 42(1)1 of the former Corporate Tax Act, Article 13(1)1 of the Assets Revaluation Act, and the proviso of Article 33(1) of the Assets Revaluation Act, it is determined that the Defendant may impose corporate tax on the Plaintiff, a non-profit domestic corporation, for taxable income, as long as the disposition for taxation is based on the former Corporate Tax Act and the Assets Revaluation Act, it does not violate the principle of no taxation without law.

(C) Even though the above revaluation reserve has the same nature as capital surplus that is excluded from the taxable object of the corporate tax, such circumstance alone cannot admit the Plaintiff’s above assertion.

3. Conclusion

Therefore, the judgment of the court of first instance is just, and the appeal of the plaintiff and the defendant is dismissed as it is without merit. It is so decided as per Disposition.

Judges Kim Yong-Hun (Presiding Judge)