Cho High Court Decision 201Do0249 ( October 24, 2011)

It is reasonable to see that it is a loan for purchasing real estate by an association aimed at real estate rental business.

Since interest expenses on loans are deemed to have been agreed upon by considering the terms of a partnership agreement to pay the interest expenses on loans from the revenue of a joint project as the obligations of the partnership, it is reasonable to view the loans that the partnership received in order to purchase real estate necessary for carrying on a real estate rental business, which is a business purpose. Unless there is any evidence that such legal relation is fictitious or that there is no relevant provision denying its validity as an act of tax avoidance,

2011Revocation of disposition of revocation of global income tax assessment

United StatesA and one other

Head of Nowon Tax Office et al.

November 4, 2011

December 2, 2011

1. On June 1, 2010, the head of the Defendant Nowon-gu Tax Office imposed global income tax of 5,037,300, global income tax of 2005, global income tax of 2006, 29,620,190, global income tax of 2007, global income tax of 59,700,150, global income tax of 2008, global income tax of 23,947, and 150, global income tax of 2008, global income tax of 23,947, and 150 for 205, global income tax of 205,519,80,80, global income tax of 2006, global income tax of 24,57,070, global income tax of 200, global income tax of 3050, global income tax of 2050, global income tax of 208, and tax of 297.

2. The costs of lawsuit shall be borne by the Defendants.

The same shall apply to the order.

1. Details of the disposition;

The following facts can be acknowledged in full view of each of the statements in Gap evidence 1-1-4, Gap evidence 2, Eul evidence 1-2, Eul evidence 1-2, and the whole purport of the pleadings.

A. The plaintiffs jointly own each real estate listed in the separate sheet in attached Form 1 (hereinafter referred to as the "real estate in this case") and jointly operate a real estate rental business at the 000-0 (hereinafter referred to as the "joint business in this case") of Nowon-gu, Seoul.

B. On August 30, 2005, the Plaintiffs received loans of KRW 3,000,000,000 from a new bank (hereinafter “the instant primary loan”), and paid part of the purchase price of the instant real estate. For convenience, Plaintiff UA was as the title of debt for the instant primary loan.

C. On August 30, 2006, the Plaintiffs received loans of KRW 3,560,000,00 from one bank (hereinafter “the second loans”), and repaid the first loans.

D. In calculating each income amount of the joint ventures of this case in 2005 to 2008, the Plaintiffs appropriated each interest paid on each of the loans of this case 1 and 2 as follows (hereinafter “interest paid on each of the instant issues”) as necessary expenses. The Plaintiffs reported and paid the respective comprehensive income tax in 2005 to 2008.

E. As a result of the tax investigation on the plaintiffs, the director of the Labor Relations Office determined that the interest on each of the issues of this case was not included in necessary expenses by deeming that the interest on each of the issues of this case constitutes personal loans for the payment of the plaintiffs' contributions.

F. Accordingly, on June 1, 2010, the head of the labor force tax office imposed upon the Plaintiff UA on the following: (a) on June 1, 2010: (b) on global income tax for the year 2005; (c) global income tax for the year 2006; (d) global income tax for the year 2006; (d) global income tax for the year 2007; (e) global income tax for the year 209,700,150; and (e) global income tax for the year 2008; and (e) on global income tax for 23,947, and 150; and (e) on June 1, 2010, the head of the labor force tax office notified the Plaintiff UB of the results of the above tax investigation on global income tax for the year 205; (e) on global income tax for the year 2005; and (e) on global income tax for the year 2007, 20507.

2. Whether each of the dispositions of this case is legitimate

A. The parties' assertion

(i)The plaintiff's assertion

A) The primary argument

Since each of the loans of this case 1 and 2 is not a loan for the plaintiffs' investment, but a real estate purchase fund to run a real estate rental business after an investment is completed, the interest paid on each of the above loans shall be included in necessary expenses as the interest paid on the debt directly used to obtain a real estate rental class.

B) Preliminary assertion

The first loan of this case is extended to the plaintiffs for their investments.

Even if the second loan of this case was made, the interest paid on the second loan of this case constitutes necessary expenses.

2) Defendant’s assertion

In addition, in order to run a real estate rental business, as long as the plaintiffs have already paid the remainder of the real estate with the first loan of this case before business registration, each of the first and second loans of this case constitutes an individual obligation of the plaintiffs.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Determination

(i)a fact of recognition;

The following facts are either disputed between the parties, or acknowledged in full view of the purport of the whole pleadings in the entries in Gap evidence Nos. 2 and 3-1 to 5. Gap evidence Nos. 4 through 6:

A) On July 1, 2005, the Plaintiffs entered into a partnership agreement (hereinafter referred to as the “instant partnership agreement”) with the purpose of running a leasing business on the instant real estate, and the main contents thereof are as follows.

B) On July 7, 2005, the Plaintiffs concluded a sales contract to purchase the instant real estate at KRW 3.825.153.700 on July 7, 2005, and agreed to pay KRW 382,515,370 on July 7, 2005; KRW 382,515, and 370 on August 10 of the same year; and KRW 3,060 on September 23 of the same year.

C) Accordingly, the Plaintiffs paid each amount invested by the Plaintiffs in accordance with the instant trade agreement, including the down payment, and the remainder of the purchase price was paid as the amount of the first loan and the rental deposit succession. On August 30, 2005, the Plaintiffs completed the registration of ownership transfer as to each of the 1/2 shares of the instant real estate.

D) On August 30, 2005, the Plaintiffs registered the business as a joint proprietor of the Nowon-gu Seoul Special Metropolitan City, Nowon-gu, its location as “D building, September 01, 2005, 00-0 of set-off Dong, Seoul Special Metropolitan City, Nowon-gu, and its location as “business leasing business,” and “type leasing.”

E) On the other hand, on September 23, 2005, the Plaintiffs concluded a contract to increase their investments in KRW 700,000,000 ( KRW 350,000,000, and KRW 350,000,000, and KRW 350,000,000 in the investments of Plaintiff KimB), respectively, on November 1, 2005, with the investments of KRW 900,000,00 ( KRW 450,000,000, and KRW 450,00,000 in Plaintiff KimB’s investments).

ii)judgments

A) Relevant legal principles

Inasmuch as whether a resident will operate a real estate rental business with his/her own capital or by means of a loan is a matter of individual choice, in calculating the resident’s income amount, even in cases where the original loan used to acquire real estate for rent out of his/her own capital has been repaid for other loans thereafter, and where the real estate for rent out of his/her own capital has been acquired and subsequently used to recover invested capital, unless there exist special circumstances, such as that the excess withdrawn (if the total amount of assets for business, which are non-taxable items, falls short of the total amount of liabilities, the amount falling short thereof) constitutes a liability equivalent to the amount of debts equivalent to the amount of excess withdrawn (if the total amount of assets for business falls short of the total amount of liabilities, the amount falling short thereof) and the obligation directly used to carry on the business is deemed as a liability corresponding to the assets necessary for carrying on the real estate rental business, and thus, the payment of the loan should be deemed as having been reduced to necessary expenses (see, e.g., Supreme Court Decisions 200Du1799, Jan. 14, 2019).

B) Whether each of the issues of the instant case was the necessary expenses of the interest payer

In light of the following circumstances, in addition to the purport of the entire argument revealed in the facts acknowledged as above based on the above legal principles, it is reasonable to view the first loan of this case not only the amount borrowed by the plaintiffs to perform the investment obligation under the business partnership agreement of this case, but also the amount borrowed by the association whose members are the plaintiffs in order to purchase the real estate of this case necessary for the operation of the real estate rental business, which is its business purpose. Since the second loan of this case was borrowed to repay the first loan of this case, the principal payer of each issue of this case constitutes the interest paid on the debt directly used to obtain the total amount of income, which constitutes the necessary expenses corresponding to the total amount of income of the common business establishment of this case. Accordingly, the defendant's each disposition of this case

(1) Article 703(1) of the Civil Act provides that "a partnership becomes effective when two or more persons have agreed to make a joint investment and operate a joint business." Since a partnership is established only with the agreement of the parties, the time when the association whose members are the plaintiffs is the plaintiffs is formed is July 1, 2005, which is the date of conclusion of the business agreement of this case, and the lending of the first loan of this case made thereafter can be deemed as an ordinary partnership activity, while the business registration for which the plaintiffs applied for on August 30, 2005 is merely the registration of the joint business proprietor, which is the unit of calculating the taxable income under tax law.

(2) According to the instant trade agreement, each of the plaintiffs invested 200,000,000,000 won, and the above project cost is agreed to cover the funds borrowed from the bank. Thus, the scope of the plaintiffs' investment obligation is limited to 200,000,000 won, respectively.

(3) In light of the contents of the instant trade agreement that stipulates that interest expenses on loans shall be paid from the revenue of the joint business, the Plaintiffs agreed to the first loan of this case as the obligations of the partnership. However, in operating a real estate rental business, such legal relations chosen by the Plaintiffs shall be respected by the tax authorities unless there is any evidence suggesting that the act constitutes a disguised act or there is any relevant provision denying its validity as an act of tax avoidance.

(4) The plaintiffs did not engage in real estate rental business in the form of joint business, and if one of the plaintiffs operates real estate rental as an individual entrepreneur, the key payer of this case may be deemed necessary expenses. The plaintiffs' handling of real estate rental business in the form of joint business is discriminatory treatment without reasonable grounds for the same economic substance.

3.In conclusion

Therefore, the plaintiffs' claim of this case is reasonable, and it is so decided as per Disposition.