Dai Construction (Law Firm Hong, Attorney Park Jae-hoon, Counsel for the plaintiff-appellant)

Head of Dong District Office

June 24, 2015

Cheongju District Court Decision 2014Guhap10252 Decided August 14, 2014

1. Of the judgment of the court of first instance, the part against the defendant in excess of the order to revoke is revoked, and the plaintiff's claim corresponding to the revocation portion is dismissed.

Of the disposition imposing corporate tax on the Plaintiff on January 2, 2013, the part exceeding KRW 1,916,145,541 and KRW 1,538,203,521 related to each retirement allowance of Nonparty 1, Nonparty 2 and Nonparty 4 as the income earner, and the part exceeding KRW 1,310,65,60,60, and KRW 1,327,138,286, and 286, of the disposition imposing corporate tax on the Plaintiff for the year 2009, and the part exceeding KRW 1,49,558,383, and 1,49,58, and38, and 286, of the disposition imposing corporate tax on the Plaintiff, respectively, shall be revoked.

2. The defendant's remaining appeal is dismissed.

3. Of the total litigation costs, 80% is borne by the Plaintiff, and the remainder is borne by the Defendant, respectively.

1. Purport of claim

The Defendant’s disposition of imposition of corporate tax for the year 2009 against the Plaintiff on January 2, 2013 (i.e., KRW 1,916,145,541 and (ii) disposition is revoked.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

1. Details of the disposition;

The court's explanation on this part is consistent with the corresponding part of the reasoning of the judgment of the court of first instance, except for the change of the part 6 and the part 6 of the reasoning of the judgment of the court of first instance as follows. Thus, this part of the reasoning of the judgment of the court of first instance is cited in accordance with Article 8 (2) of the Administrative Litigation Act and

I. On January 2, 2013, the Defendant issued a revised and notified the corporate tax for the business year 2009 by reflecting the retirement allowance not included in the deductible expenses as seen above to the minton, etc., and disposed of each excess amount as an recognition granted to Nonparty 1, etc. and notified the change in the amount of income. Among them, the part disputing the Plaintiff in the instant case is as indicated below in the list of “the details of notification of the change in corporate tax and income amount” (hereinafter “instant disposition”).

In 680,205,03 non-party 1,822,928,384 Key Construction, June 14, 2009,865, non-party 21,651, non-party 21,650,195,100 Hexling f21,075, 397 non-party 41,666,676,786,786 in 209, the sum of 1,916,145,541 aggregate of 5,139,80,270,270

(j) Before the merger, mining agent, etc. filed an appeal with the Director of the Tax Tribunal against the disposition of imposition of corporate tax and notification of change in income amount. However, the Director of the Tax Tribunal dismissed all of the part on the instant disposition of taxation on February 13, 2014 of the said appeal.

2. Whether the instant disposition is lawful

A. The parties' assertion

(1) Summary of the Plaintiff’s assertion

Each of the instant retirement allowances paid to non-party 1, etc. under each of the instant retirement allowances established through a temporary general meeting of employees through each of the instant provisions in accordance with the articles of incorporation, etc. is included in deductible expenses in full pursuant to Articles 19 and 26 of the Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the “Corporate Tax Act”) and Article 44(4) of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21972, Dec. 31, 2009; hereinafter the “Enforcement Decree of the Corporate Tax Act”), however, under the premise that Article 52 of the Corporate Tax Act is applied to the calculation of total amount of retirement allowances in violation of the former payment standards of the retirement allowances in accordance with each of the instant retirement allowances, including the establishment, etc. prior to the merger, and thus, the Defendant’s disposition of non-party 1’s calculation of each of the instant retirement allowances in violation of the statutory provision of the Corporate Tax Act’s No. 2.

(2) The defendant's argument

Although each of the instant retirement allowances was paid in accordance with the provisions on the payment of retirement allowances for each of the instant officers prepared by each of the instant retirement allowances through a temporary general meeting of employees in accordance with the articles of incorporation, it is excessive in light of the generally accepted social norms. Therefore, applying the provision on the payment of retirement allowances for each of the instant officers, such as a temporary general meeting of employees under Article 52 of the Corporate Tax Act, the resolution on the payment of excessive retirement allowances is null and void, and thus, Article 44(4)2 of the Enforcement Decree of the Corporate Tax Act should be applied by deeming that there is no provision on the payment of retirement allowances for each of the instant officers, but Article 44(4)2 of the Corporate Tax Act should be applied by deeming that there is no provision on the payment of retirement allowances

Even if it is reasonable to calculate retirement allowances according to the provision on the payment of retirement allowances for each of the officers of the instant case [average wage for March immediately preceding retirement 】 the number of years of service 】 the rate of payment (20 times) 】, the bonus paid in excess for that three months should be excluded from the average wage for March immediately preceding retirement. Thus, only some of the issues in the instant case can be revoked.

B. Relevant statutes

The court's explanation on this part is identical to the corresponding part of the reasoning of the judgment of the court of first instance. Thus, this part of the reasoning of the judgment is accepted by Article 8 (2) of the Administrative Litigation Act and Article 420 of the Civil Procedure Act.

C. Determination

(1) Inclusion of retirement allowances prescribed by the articles of incorporation

(A) Article 19(1) of the Corporate Tax Act and Article 19 subparag. 3 of the Enforcement Decree of the Corporate Tax Act provide that personnel expenses shall be deemed as deductible expenses, and Article 26 subparag. 1 of the Corporate Tax Act provides that the amount deemed excessive or unreasonable as prescribed by Presidential Decree among personnel expenses shall not be included in deductible expenses in calculating the income amount of a domestic corporation for each business year. Article 44 of the Enforcement Decree of the Corporate Tax Act provides that with respect to the exclusion of retirement allowances from deductible expenses, the amount exceeding the amount delegated by the articles of incorporation or the rules on payment of retirement allowances delegated by the articles of incorporation among retirement benefits paid to an officer

(B) Regarding the instant case, as seen earlier, minmins et al. paid each of the instant retirement allowances to Nonparty 1 et al. in accordance with each of the instant provisions regarding the payment of retirement allowances for executive officers following a resolution of a temporary general meeting of employees or a general meeting of shareholders pursuant to each of the instant articles of incorporation. As such, each of the instant retirement allowances should be included in deductible expenses in calculating the amount of income for the business year 2009, such as minmins et al. prior to the merger, in principle, pursuant to Article 44(4)1 of the Enforcement Decree of the Corporate Tax Act (the Defendant’s provision on the payment of retirement allowances for executive officers of the instant case was applied to Nonparty 1 et al. immediately before the merger, and the employee or stockholder of the instant case, including minmins, etc., was formed as a relative or affiliated corporation, and there is no person who would be any issue of a temporary general meeting of employees or general meeting of shareholders where the payment regulations for each of the instant

(C) However, where a corporation pays retirement allowances for officers prescribed in the articles of incorporation, etc., it should always include the relevant amount in deductible expenses in calculating the corporation’s income amount, and further examine whether the tax authority’s adjustment in accordance with Article 52 of the Corporate Tax Act’s wrongful calculation panel cannot be permitted.

(2) The retirement allowance payment of this case and the wrongful calculation register

(A) Article 52(1) of the Corporate Tax Act provides that "where it is deemed that a domestic corporation's act or calculation of its income amount has reduced unreasonably the tax burden on the corporation's income through transactions with a related party prescribed by Presidential Decree, the head of the competent district tax office or the commissioner of the competent regional tax office having jurisdiction over the place of tax payment may calculate the income amount for each business year of the corporation, regardless of the calculation of the corporation's income amount," Paragraph (2) provides that "in applying Paragraph (1) 1, it shall be based on the prices (including rates, interest rates, rents, exchange rates, and other equivalent rates; hereafter referred to as "market prices" in this Article) applied or deemed applicable to sound social norms, commercial practices, and normal transactions between a person who is not a related party, and Article 52(1) through (3) provides that "in applying the provisions of paragraphs (1) through (3), matters necessary for the calculation of the market price, etc. of wrongful calculation type and calculation shall be prescribed by Presidential Decree." Article 88 of the Enforcement Decree of the Corporate Tax Act so delegated provides "type of wrongful calculation, etc."

(B) With respect to the issue of whether the instant retirement allowance payment to Nonparty 1, etc., prior to the merger, etc., could be subject to unfair calculation under Article 52 of the Corporate Tax Act, the following circumstances, namely, ① Nonparty 1, etc., who are shareholders or executives prior to the merger (Article 87(1)2 through 3 of the Enforcement Decree of the Corporate Tax Act), which constitute “specially related persons” under Article 52(1) of the Corporate Tax Act, and Article 88(1) of the Enforcement Decree of the Corporate Tax Act, which provides for the type of wrongful calculation of retirement income, is an exceptional provision to determine the amount of retirement allowance under Article 52(2) of the Corporate Tax Act (see, e.g., Supreme Court Decisions 92Nu114, Oct. 13, 192; 3, 2007; 4, the Plaintiff’s calculation method, regardless of whether the said amount would be subject to unfair calculation of retirement income under Article 88(1)9 of the Enforcement Decree of the Corporate Tax Act, may not be subject to the tax calculation of retirement income tax.

(C) Meanwhile, in a case where a corporation’s wrongful calculation is deemed to have avoided or reduced tax burden by unfairly abusing the various forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act without using a reasonable method with a person having a special relationship, it shall be deemed that the taxation authority denies it and has the income deemed objective and reasonable by the method stipulated in the laws and regulations. In light of the economic person’s position, it shall be limited to a case where it is deemed that the economic rationality was neglected due to the wrongful and unreasonable calculation of unfair acts. Determination of whether the transaction was economic rationality shall be based on whether the transaction was conducted in light of sound social norms and commercial practices, and shall also be based on whether the transaction was conducted with a special relationship and special circumstances at the time of the transaction (see, e.g., Supreme Court Decision 2005Du14257, Dec. 13, 2007).

In light of the following circumstances, which can be seen by comprehensively taking account of the facts without dispute between the parties, Gap evidence Nos. 1 and Eul evidence No. 10, and the purport of the entire pleadings, namely, ① The principal shareholders, such as the establishment of the former establishment, etc., consisting of the family members and relatives of the non-party 3, who are affiliated companies, and thus, the original construction is likely to have de facto influence on the management of the plaintiff. The officers, non-party 1 and the non-party 2 are the children of the original construction, and the non-party 4 were the non-party 3's fraud; ② the establishment of the former establishment, etc. before the merger, the total amount of 9,022,265,897 won (the former merger, △△△△, 265,046 won, △△△△△, 243, 6397, 2500 won, and 305 billion won (the former merger, 400 million won).

(D) However, the tax authority’s assertion and burden of proof of “market price”, which serves as the basis for determining the scope of non-deductible retirement benefits when considering the act of paying each of the instant retirement benefits as the object of unfair calculation, is the tax authority’s wrongful calculation (see, e.g., Supreme Court Decision 2003Du15287, May 12, 2005; Supreme Court Decision 86Nu378, Apr. 14, 1987). Since the provision on the payment of retirement allowances for each of the instant officers is null and void, the “fixed retirement allowances” of non-party 1, etc., applied the standard under Article 44(4)2 of the Enforcement Decree of the Corporate Tax Act [1/10 of the former Enforcement Decree x the number of years prior to retirement 10 x the number of years prior to the merger x the number of years prior to the merger 200 x the former standard for the payment of retirement allowances to non-party 1’s employees for the same business year.

(E) Ultimately, each of the instant retirement allowances payment acts is subject to the avoidance of wrongful calculation, but it is difficult to view that there is the Defendant’s assertion and certification as to the criteria for determining the scope of “market price” or “reasonable retirement allowances” of the officers, etc. against Nonparty 1, etc., without excluding the payment provisions of each of the instant retirement allowances in force, and subsequently, it is difficult to allow the Defendant to’s exclusion of excess retirement allowances from deductible expenses.

(3) Re-determination of retirement allowances according to the payment provision of retirement allowances for each officer of the instant case

(A) Article 19(1) of the Corporate Tax Act and Article 19 subparag. 3 of the Enforcement Decree of the Corporate Tax Act provide that personnel expenses shall be deemed as losses, and Article 26 subparag. 1 of the Corporate Tax Act provides that the amount deemed excessive or unreasonable as prescribed by Presidential Decree among personnel expenses shall not be included in deductible expenses in calculating the income amount of a domestic corporation for each business year of a domestic corporation. Article 43(2) of the Enforcement Decree of the Corporate Tax Act provides that where the amount exceeds the amount paid according to the standards for payment of wages determined by articles of incorporation, general meeting of shareholders, general meeting of employees or resolution of the board of

(B) Comprehensively taking into account the facts acknowledged earlier and the purport of the entire pleadings with respect to the instant case, namely, ① mins et al. prior to the merger shall be deemed to have been paid only wages of KRW 5,389,50 per month to Nonparty 1 et al. from January 2008 to August 2009, and the Defendant paid KRW 20,000 to Nonparty 1 et al. (hereinafter “each immediately preceding retirement allowance”) through 30,00 won per month for the immediately preceding 2 to 4 months from the retirement of the executives et al. (hereinafter “the immediately preceding retirement allowance”) in light of the following circumstances: (i) mins et al. before the merger that were paid to Nonparty 1 et al. for the immediately preceding retirement allowance by a resolution of the board of directors; and (ii) 30,000 to have been paid for each of the immediately preceding retirement allowances that were determined to have been paid for the immediately preceding retirement allowance by a resolution of the immediately preceding merger or 50, etc.

(C) Meanwhile, comprehensively taking account of the facts acknowledged earlier and the purport of oral argument, i.e., the 2009 net losses per business year from 209 to 9,022,265,897, etc., the Plaintiff paid each of the immediately preceding retirement allowances of about 5,389,50 won, which were paid to Nonparty 1, etc. for the previous 19 months to 20 months, without any wage payment standard determined by a resolution of the articles of incorporation, etc., and (ii) there was no evidence suggesting that Nonparty 1, etc. received the immediately preceding retirement allowance of each of the above 5 months to 30 months, including the amount of monthly retirement allowance of each of the above 9 months to 30 months before and after the merger, and that the amount exceeded 5 months before the immediately preceding retirement allowance of each of the above 3 months to be paid to Nonparty 1, etc., on the premise that the payment provision of the retirement allowance of each of the above 5 months prior to the merger was not an excessive amount.

(D) Ultimately, the Defendant’s disposition at issue of this case’s issue is erroneous that it determined the retirement allowance of Nonparty 1, etc. by applying the former retirement allowance payment standard (one year’s salary x 1/10 x continuous service x payment rate x five times) without excluding the amount recognized as excessive payment of the above “for one year’s salary” (=5,500 won x 5,389,500 x 12 months). However, the Defendant’s disposition at issue of this case’s issue is justifiable in itself by replacing Nonparty 1, etc. with the amount, excluding the amount recognized as excessive payment of the above “for one year’s salary”.

Therefore, even in cases where a retirement allowance is calculated by non-party 1, etc. according to the provisions on payment of retirement allowances for each of the officers of this case [average wages for the three months immediately preceding the retirement x the number of years held office x the payment rate (20 times)], the "average wages for the three months immediately preceding the retirement" shall include the average amount excluding the wages paid excessively during the three-month period (amount exceeding 5,389,500 won per month), i.e., the average amount 5,389,500 won per month (= 16,168,500 won/ 5,500 won x 5,300 won x 5,389,50) x 3 months) ± 3 months]. On the other hand, the notice of changes in corporate tax amount and each income amount which are estimated by non-party 1, etc. calculated in excess of the amount of retirement allowances for each of the officers of this case shall be as stated in the

(4) Partial revocation of a disposition

(A) In a lawsuit seeking the revocation of a taxation disposition, the subject matter of adjudication is whether the tax base and tax amount notified by the tax authority exist objectively. In a case where the tax base and tax amount recognized by the disposition are excessive compared to the legitimate tax base and tax amount, the disposition of imposition is unlawful within the scope exceeding the reasonable tax base and tax amount (see Supreme Court Decision 88Nu6504, Mar. 28, 1989). Thus, the relevant

(B) Ultimately, the part to be revoked in the instant disposition is the part that exceeds the amount indicated in the “total sum of property values” column of the corporate tax amount stated in the attached Table and the notified amount of change in income amount, respectively, in the “property fixed amount” column.

3. Conclusion

Therefore, among the disposition imposing corporate tax on the plaintiff on January 2, 2013, the part in excess of KRW 1,916,145,541, and KRW 1,538,203,521, and the part in excess of KRW 1,49,558,383, and the part in excess of KRW 1,310,656,60, and KRW 1,327,138,286, and 286 of the disposition imposing corporate tax on the plaintiff on the plaintiff on January 2, 2013, which is the plaintiff, for the non-party 1,49,538,521, and the non-party 1,49,58,38, and the part in excess of KRW 1,310,60, and the non-party 2, who is the non-party 4, as the income earner, are unlawful. The judgment of the court of first instance is dismissed as it is without merit.

[Attachment]

Judges Landscaping (Presiding Judge)

1) The income earner’s 1,822,928,384 won, income earner’s 1,650,195,100 won, and income earner’s 1,66,676,786 won, each disposition of notification of change in the amount of income made by Nonparty 4 to Nonparty 4 (see respectively, e.g., the written application for change in claims made by Nonparty 26, 26 pages, 5 pages, and 1, 2014).