Co., Ltd. (Attorney Lee In-bok, Counsel for defendant-appellant)

Head of North Daegu Tax Office

October 20, 2015

1. The plaintiff's claim is dismissed.

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

The Defendant’s disposition of imposing corporate tax of KRW 12,616,170,70 (including additional tax) for the business year of 2011 against the Plaintiff on April 3, 2013 is revoked.

1. Details of the disposition;

A. On April 1, 2008, the Plaintiff: (a) was established with the trade name of “F&C Holdings”; (b) merged C&C Co., Ltd. (hereinafter “C&C”) on June 29, 201; and (c) changed the trade name thereafter to “C&C Co., Ltd.”

B. On October 201, the Plaintiff filed an application with the court for a payment order of the outstanding claim amounting to KRW 33,858,486,508 (hereinafter “the instant claim”) against Edi-Urban Development Co., Ltd. (hereinafter “Edi-Urban Development”), which had been held prior to the instant merger, and received final judgment. On November 23, 201, the Plaintiff filed an application for compulsory execution based on the payment order, and filed an application for compulsory execution with the Seoul Central District Court for a compulsory execution order. Based on this, the Plaintiff filed a report on the tax base and tax amount of corporate tax by including the instant claim in deductible expenses as bad debt for the business year 2011.

C. From November 26, 2012 to December 31, 2012, the commissioner of the Daegu Regional Tax Office conducted a partial investigation of the Plaintiff’s corporate tax for the business year 2010 to 2011. Before the instant merger, he/she deemed that the cause for bad debt of the instant claim had already been met prior to the instant merger and did not recognize bad debt of the instant claim as bad debt of the Plaintiff pursuant to Article 19-2(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 24357, Feb. 15, 2013; hereinafter the same). The director of the Daegu Regional Tax Office denied bad debt of the instant claim 41,325,305,611 won for the business year 27,978,731,278 won in excess of the bad debt allowance for the bad debt of the Plaintiff, and the Defendant rendered a correction and notification thereof to the Plaintiff on April 3, 2013 (hereinafter “instant”).

D. The Plaintiff appealed and filed an appeal with the Tax Tribunal on May 10, 2013, but was dismissed on April 1, 2015.

【Ground of recognition】 The fact that there is no dispute, Gap's 1 through 5, Eul's 1 through 3, the purport of the whole pleadings and arguments

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) In order to constitute “a claim which cannot be recovered due to the discontinuance of business” under Article 19-2(1)8 of the former Enforcement Decree of the Corporate Tax Act, the fact that it is impossible to recover should be objectively determined. The impossibility of collecting the instant claim was objectively determined only when the court’s protocol of impossibility of compulsory execution was prepared on November 22, 201, and at the time of the merger, the impossibility of collecting the instant claim is not yet objectively determined. Nevertheless, the disposition against the Plaintiff, which the Defendant denied inclusion of the instant claim in deductible expenses, was unlawful.

2) Since the legal fiction of Article 19-2(4) of the former Enforcement Decree of the Corporate Tax Act cannot be applied because the impossibility of collecting the instant claim was not objectively determined until the time of the instant merger, the instant claim constitutes a matter of settlement adjustment and thus constitutes a bad debt and should be included in deductible expenses for the business year during which the Plaintiff handled the accounts as bad debt. Nevertheless, the Defendant arbitrarily denied the details of the Plaintiff’s accounting, and the instant disposition against the Plaintiff is unlawful.

B. Relevant statutes

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

(c) Fact of recognition;

1) On March 24, 2006, C&W entered into a contract for the construction and sale of an apartment between the Edi City Development, which is the implementer of the construction and sale of Ediet apartment 513 households in the Yannam-gun, the Yannam-gun, the Yannam-gun, and the sale of an apartment after completing the construction work on April 30, 2008.

2) However, as the apartment sales performance was low due to the real estate market erosion, Ed City Development: (a) secured trust (trust value of KRW 23.4 billion) with an international trust company and borrowed KRW 23 billion to the international trust company; (b) but (c) failed to repay it. Accordingly, Ed City Development made efforts to improve business management by selling 171 households out of the mortgaged apartment, by public auction, and receiving a decision to commence rehabilitation procedures from the Daegu District Court on June 11, 2009 from the Daegu District Court on June 30, 2010. However, Ed City Development reported the closure of business on the calendar on June 30. 201.

3) On November 18, 2010, the director of the regional tax office disposed of the amount of 8 million won in arrears for the development of e-mail on the ground of non-property.

4) Meanwhile, C&C filed an application for corporate rehabilitation procedures on June 11, 2009 by the Daegu District Court’s Bankruptcy Division due to business deterioration, and received the rehabilitation plan approval on December 10, 2010. On the other hand, C&C prepared and submitted a property investigation report to the effect that it is impossible to recover the total amount of the instant claims on August 26, 2009.

5) The C&C bank and the Plaintiff filed a request to the credit information company of the C&C before and after the instant merger and conducted a credit and property investigation on the development of the E.C. The date and time of the request, the date and time of receipt of a property investigation report, and the result of investigation

As a result of the credit investigation of the date and time of request by the data subject subject subject subject subject subject of classification contained in the main sentence, the credit investigation was conducted on March 17, 201 from the date of receipt of the report, and as long as the national credit information, which is not recoverable property on June 20, 201 from the date of request on June 20, 201, is not recoverable property on July 4, 2011 from the date of request on July 14, 2011, Plaintiff 1, as long as it is not recoverable property, shall not be recovered property on July 14, 2011.

6) At the time of the instant merger, the Plaintiff requested the Ulsan Accounting Corporation to make a stock appraisal for the purpose of calculating the merger ratio. Since the Ulsan Accounting Corporation’s rate of setting up the allowance for bad debts of the instant claim exceeds 50% (94.7%), the Plaintiff determined that the instant claim was a claim that can be fully recovered and assessed the original amount of the claim as KRW 0.0.

7) On the other hand, on April 201, 201, before the instant merger, EM group disposed of securities held by its affiliate companies, etc. through the Plaintiff (before the instant merger) and subsequently gave approximately KRW 50.4 billion profit, the Plaintiff filed a tax return for interim prepayment of KRW 9.5 billion by reflecting the Plaintiff’s business year in 2011, and thereafter, the Plaintiff filed a tax return for interim prepayment of KRW 9.5 billion with respect to the total amount of the instant bonds as bad debt for the business year 2011, and filed a return for all interim prepayment corporate tax as above.

【Ground of recognition】 The fact that there has been no dispute, the evidence before it, the entry of Gap's 6 or 8, and the purport of whole pleading

D. Determination

1) Article 19-2(1) of the Corporate Tax Act provides that “The amount of bonds which cannot be recovered due to reasons prescribed by Presidential Decree, such as the debtor’s bankruptcy, among the bonds held by a domestic corporation (hereinafter “deductible expenses”) shall be included in deductible expenses for the purpose of calculating the income amount for the pertinent business year.” Article 19-2(1)8 of the former Enforcement Decree of the Corporate Tax Act provides that “The bonds which cannot be recovered due to the debtor’s bankruptcy, compulsory execution, execution of punishment, discontinuance of business, death, disappearance, or missing” shall be one of the “bonds irrecoverable due to such reasons prescribed by Presidential Decree” and Article 19-2(3)2 of the same Act provides that “In the case of bad debts due to such reason as prescribed in subparagraph 8, the deductible expenses shall be included in deductible expenses for the business year in which the date on which the relevant reason occurred and appropriated as deductible expenses falls.” However, Article 19-2(4) of the same Act provides that “the bad debts falling under subparagraphs 8 through 13 of paragraph (3) are merged with another corporation or divided expenses.”

Meanwhile, Article 19-2 (1) 8 of the former Enforcement Decree of the Corporate Tax Act refers to a claim that is objectively confirmed that the whole of a claim is impossible to recover due to the discontinuation of the debtor's business during the business year in which the debtor's business was included in deductible expenses (see Supreme Court Decision 2006Du1098, Jul. 10, 2008, etc.). The bad debt included in deductible expenses is objectively known as satisfying the requirements for bad debt, and it does not require that the required documents, such as "written non-performance of execution," etc., due to the debtor's non-property as a result of compulsory execution, missing, etc. (see Supreme Court Decision 88Nu3123, Mar. 13, 190, etc.).

2) Whether the impossibility of collecting the instant claim at the time of the instant merger has been objectively confirmed

According to the statements in Gap evidence Nos. 9 and 10 (including the provisional number; hereinafter the same shall apply), the head of the regional tax office demanded the payment of delinquent tax for the Eddiv city development on or around June 2013, and the plaintiff filed a final tax return on the amount of bad debt tax for the second business year of January 26, 2012, when the plaintiff filed an application for a bad debt tax deduction on the ground that it satisfies the bad debt requirement for the claim in this case, and the defendant refunded the bad debt amount to the plaintiff and appropriated it for the delinquent amount.

However, in light of the following circumstances acknowledged earlier, the aforementioned facts and the evidence, relevant statutes, and the purport of the entire pleadings, it can be sufficiently acknowledged that the impossibility of collecting the claim of this case at the time of the merger of this case was objectively confirmed, and only the facts acknowledged earlier are insufficient to reverse such recognition. Accordingly, the Plaintiff’s assertion on a different premise is without merit.

① Ed city development made a report on the closure of business on June 30, 2010 due to business deterioration, which constitutes “the discontinuation of business” among the bad debt grounds under Article 19-2(1)8 of the former Enforcement Decree of the Corporate Tax Act.

② In light of the fact that there was no particular change in the financial status of the Ediurban development at the time of the instant merger and the Plaintiff’s failure to perform execution from the court, and that the head of the regional tax office written off the disposition of deficit on or around November 8, 2010 on part of the amount in arrears for Ediurban development, it is difficult to deem that the Plaintiff was unable to recover the instant claim only after the time when the Plaintiff received a report of impossibility

③ The property investigation report on C&C prepared on August 26, 2009; the credit investigation report prepared from June to July 2010 to three credit information companies; and the stock evaluation result conducted by the Han Accounting Firm during the process of the instant merger were presented as to the instant claims. Although documents such as the court’s non-performance of enforcement, it is reasonable to deem that the instant claims were in an irrecoverable state at the time of the instant merger, and the Plaintiff was aware or could have been fully aware of them around that time.

④ The purport of Article 19-2(4) of the former Enforcement Decree of the Corporate Tax Act is to prevent a merged corporation from enjoying a reduction effect by including its non-performing loans in deductible expenses for the business year in which the merged corporation succeeded, and at the time of the merger, the Plaintiff received profits in determining the merger ratio, etc. by assessing the value of the bonds of this case at the time of the merger as “0.” However, the Plaintiff included the claim of this case at the time of the merger in deductible expenses on the premise that the entire recovery of the claim of this case after the merger is possible, which seems to be contrary to the legislative intent

⑤ Report related to deduction of bad debt tax amount (Evidence 11) is merely a document prepared by the Plaintiff or C&C. It is difficult to view it as evidence to prove that the tax authority had expressed its view that the cause of bad debt has not yet occurred at the time of the instant merger. The content of the report seems not related to corporate tax, but to consult about deduction of bad debt tax amount of value-added tax.

④ Even if the Defendant recognized a bad debt tax deduction for the instant claim when determining the amount of value-added tax on February 2011, the determination of value-added tax is based on the reported data submitted by the taxpayer. According to Article 57 of the Value-Added Tax Act, in the event there is an error or omission in the details of the preliminary or final return, the tax authority may rectify the amount. Thus, even if the Defendant deducted the instant claim as bad debt tax in the process of establishing the value-added tax on February 2011, it is difficult to deem such circumstance as the ground that the instant disposition was unlawful.

3) Whether the inclusion of the instant claim in deductible expenses constitutes a matter of settlement and adjustment

The bad debt under Article 19-2(1)8 of the former Enforcement Decree of the Corporate Tax Act does not legally extinguish the corresponding claim. However, in the case of a merger of corporations, it constitutes settlement adjustment that requires the recognition of deductible expenses that the corporation should include bad debt in deductible expenses by recognizing that bad debt occurred as an account clearly due to impossibility of recovery, as it is, in view of the debtor's asset status, payment ability, etc., it is a matter of reporting and adjustment that can be deemed as being appropriated as deductible expenses for the business year of the merged corporation to which the date of the merger registration belongs, notwithstanding whether the merger is actually appropriated as deductible expenses (Article 19-2(4) of the former Enforcement Decree of the Corporate Tax Act).

As seen earlier, inasmuch as a cause for bad debt occurs as the impossibility of collecting the claim of this case was objectively determined at the time of the merger, regardless of whether the Plaintiff, a taxpayer, specifically perceived such circumstances, the inclusion of the claim of this case in deductible expenses should be subject to the application of Article 19-2(4) of the former Enforcement Decree of the Corporate Tax Act, and thus, the inclusion of the deductible expenses of the claim of this case in deductible expenses constitutes the matter of settlement of accounts. Therefore, this part of the Plaintiff’s assertion premised on the premise that the inclusion in deductible expenses of the claim of this case constitutes the matter of settlement of accounts

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.

[Attachment]

Judges White-Unified (Presiding Judge)