[1] Meaning of “tax investigation” under Article 81-2(2)1 of the Framework Act on National Taxes, and whether the act of a taxpayer’s tax investigation without any duty to answer or accept it constitutes “tax investigation” under Article 81-2(2)1 of the Framework Act on National Taxes, in principle, where a taxpayer’s freedom of business, etc. is not likely to infringe on the taxpayer’s freedom of business or abuse the right of tax investigation (negative)

[2] Whether the request for financial transaction information made by the head of a competent government office pursuant to Article 4(1)2 of the Act on Real Name Financial Transactions and Confidentiality constitutes a tax investigation under the Framework Act on National Taxes (negative)

[1] Article 81-2(2)1 of the Framework Act on National Taxes, Article 170 of the former Income Tax Act (Amended by Act No. 13558, Dec. 15, 2015) / [2] Article 4(1)2 of the Act on Real Name Financial Transactions and Confidentiality, Article 81-2(2)1 of the Framework Act on National Taxes, Article 170 of the former Income Tax Act (Amended by Act No. 13558, Dec. 15, 2015)

[1] Supreme Court Decision 2014Du8360 Decided March 16, 2017 (Gong2017Sang, 790)

Plaintiff (Law Firm LLC, Attorneys Kang Han-hun et al., Counsel for the plaintiff-appellant)

The Head of the District Tax Office (Law Firm LLC, Attorneys Jeon Young-young et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2016Nu76079 decided April 4, 2017

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. As to the second ground for appeal

A. (1) Article 7-2 of the Framework Act on National Taxes provides for the method, procedure, limitation, etc. of a tax official’s exercise of his/her authority to conduct a tax investigation under the title of “taxpayer’s right” and Article 81-2(2)1 of the same Act provides that “where a tax official asks questions to determine or correct the tax base and amount of national tax, or inspects or investigates the relevant account books, documents, or other articles or orders the submission thereof (including a tax offense investigation under the Procedure for the Punishment of Tax Evaders Act),” and Article 170 of the former Income Tax Act (amended by Act No. 1358, Dec. 15, 2015) also grants a public official in charge of questioning and investigating the same purport.

The above tax investigation is a kind of administrative investigation for realizing the State’s right to impose taxes, and refers to any act of investigating, investigating, or ordering the submission of books, documents, and other articles to determine or correct the tax base and amount of national taxes. In the case of a tax investigation for which the tax authority’s right to inquire and examine for the imposition of taxes is exercised, a taxpayer or a person, etc. who is deemed to have a transaction with the taxpayer (hereinafter “taxpayer, etc.”) bears the legal duty to answer questions for tax officials to collect the taxation data and allow them to undergo an inspection. However, an investigation for which a taxpayer, etc. has no or no duty to answer, and which is unlikely to infringe on the taxpayer’s freedom of business or abuse of the right to conduct an investigation is not a “tax investigation” subject to the provisions of Chapter VII of the Framework Act on National Taxes in principle. Ultimately, whether an investigation conducted by a tax official constitutes such “tax investigation.” In full view of the purpose and process of the investigation, object and method of the investigation, data obtained through the investigation, scale and period of the investigation act, etc., individually specific cases (see Supreme Court Decision 20136Du364Du.

(2) Meanwhile, Article 4(1)2 of the Act on Real Name Financial Transactions and Confidentiality (hereinafter “Real Name Financial Transactions Act”) provides that the head of a competent government office may request a financial company, etc. to provide transaction information, etc. necessary for questioning and investigating pursuant to tax-related Acts on the grounds of the confirmation of evident data proving a suspicion of tax evasion.

B. The lower court determined to the following purport on the grounds stated in its reasoning, such as citing the first instance judgment.

(1) On September 27, 2013, the Plaintiff transferred the real estate as indicated in the lower judgment (hereinafter “instant real estate”); and on November 20, 2013, on the premise that the instant real estate is a house, the Plaintiff reported and paid the transfer income tax calculated by applying the tax exemption rate and the special deduction rate for long-term holding based on one house per household under the premise that it is a house.

(2) On September 25, 2014, the Defendant notified the Plaintiff that he/she would conduct a tax investigation regarding the transfer of the said real estate. On the other hand, from September 30, 2014 to October 15, 2014, the Defendant made a request for the provision of the instant financial transaction information (hereinafter “request for the provision of the instant financial transaction information”) by designating individual branches, etc. of the banks, including the National Bank, as the recipient of each individual branch, three times from September 30 to October 15, 2014. Based on each request for the provision of the financial transaction information, the Defendant entered “Article 4(1)2 of the Act on Real Name Financial Transactions” as the legal basis for each request for the provision of the financial transaction information, and entered “Inheritance Tax Investigation” as the purpose of use. Accordingly, the Defendant received financial

(3) From October 10, 2014, the Defendant commenced a tax investigation on the Plaintiff’s transfer income tax, and completed the tax investigation on December 15, 2014 upon the Plaintiff’s request.

(4) On January 2, 2015, the Defendant, on the ground that the instant real estate constitutes a commercial building, not a house, was subject to the instant disposition imposing capital gains tax (including penalty tax for unfair underreporting) for the year 2013 by including capital gains on KRW 900 million in the tax base among the transfer value of the instant real estate and applying the special deduction rate for long-term holding.

(5) The term “tax investigation” under the Framework Act on National Taxes, etc. is an exercise of the right to ask questions and investigate, and on the other hand, “request for financial transaction information” under the Act on Real Name Financial Transactions is not a taxpayer or a related person but a financial company, etc., and the other party is not a taxpayer or a related person. The demand for financial transaction information to a financial company, etc. does not fall under questioning a taxpayer or his/her related person, or inspection, investigation, or order the submission of books, etc., but does not impose a taxpayer’s number of obligations or infringe a taxpayer’s business freedom, etc., and such substance does not correspond to the request for the submission of data against a taxpayer, etc. According to these circumstances, the request for financial transaction information made by the head of the relevant agency pursuant to Article 4(1)2 of the Act

(6) Ultimately, the Plaintiff’s assertion that the Defendant’s request for the instant financial transaction information constitutes a tax investigation to which each provision of Article 81-7(1) of the Framework Act on National Taxes applies, Article 81-8 (Period of Tax Investigation), and Article 81-9 (Restriction on Extension of Scope of Tax Investigation) is without merit.

C. Examining the reasoning of the lower judgment in light of the evidence duly admitted, the lower court appears to be based on the foregoing provision and legal doctrine. In so doing, contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal doctrine on the scope of tax investigation to which Article 81-7 of the Framework Act

The Supreme Court precedents cited in the grounds of appeal are different from this case, and thus, are inappropriate to be invoked in this case.

2. Regarding ground of appeal No. 1

A. Article 4(2)2 of the Act on Real Name Financial Transactions provides that a person who requests transaction information, etc. pursuant to Article 4(1)2, etc. shall, in principle, request a “specific store” of a financial company, etc. according to the standard form prescribed by the Financial Services Commission, which includes the personal information of the holder of a title deed (Article 1), the transaction period subject to a request (Article 2), the legal basis for the request (Article 3), the purpose of use (Article 4) and the details of transaction information, etc. as required (Article 5).

Meanwhile, Article 83(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter the same) provides that “The Commissioner of the National Tax Service (including the commissioner of a regional tax office) may inquire the head of a financial company, etc. about taxation data on financial property of a person who is suspected of evading inheritance tax or gift tax (Article 4 of the Act on Real Name Financial Transactions), etc., in a lump sum, regardless of whether the person is suspected of evading inheritance tax or gift tax (Article 1).” It is distinguishable from the request for provision of transaction information,

B. The lower court determined to the following purport on the grounds stated in its reasoning, such as citing the first instance judgment.

(1) The instant financial transaction information request was made in accordance with the standard form stipulated by the Financial Services Commission under Article 4(2) of the Act on Real Name Financial Transactions, and the content of transaction information that requires a financial company, etc. to provide a specific store as a receiver is also specified based on the legal basis of the said request for provision. Thus, it constitutes a request for financial transaction information under Article 4 of the Act on Real Name Financial Transactions and Guarantee of Secrecy, and it cannot be seen as a package of financial assets under Article 83 of the former Inheritance Tax and Gift Tax Act.

(2) Some of the requests for the instant financial transaction information were sent to the computer room of the head office of the financial company. However, in order to facilitate the provision of each store’s financial transaction information, the financial company established a separate business support center in its head office and made it take charge of inquiries about each store’s financial transaction information. The financial transaction information actually provided was sent only to the specific store’s transaction information, as stated in the written inquiry.

(3) Although the Defendant erred by stating the purpose of using each of the above financial transaction information requests as “Inheritance tax investigation”, it is difficult to view that the procedural defect is serious in light of the above circumstances.

(4) Furthermore, according to the Plaintiff’s assertion that the Plaintiff continued living in the instant real estate in the course of the tax investigation and used it as a house, it is necessary for the Defendant to investigate the Plaintiff’s details of financial transactions on deposit money, public charges, etc. in order to verify the authenticity thereof, and thus, the Defendant’s financial transaction information requested by the Defendant exceeded the minimum scope necessary for its use purpose.

(5) Therefore, the procedure for requesting the provision of the instant gold transaction information constitutes a request for the provision of financial transaction information to a specific store under Article 4 of the Act on Real Name Financial Transactions, and thus, the instant disposition cannot be deemed unlawful.

C. Examining the reasoning of the lower judgment in light of the aforementioned statutes and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine on the requirements and interpretation prescribed in Article 4 of the Act on Real Name Financial Transactions, the permissible scope and restriction of the request for provision of transaction information under the Act on Real Name Financial Transactions, the procedural requirements for taxation, and the validity of taxation disposition due to the violation of the Act on Real Name Financial Transactions,

The Supreme Court precedents cited in the grounds of appeal are different from this case, and thus, are inappropriate to be invoked in this case.

3. As to the third ground for appeal

For the reasons indicated in its reasoning, such as accepting the judgment of the court of first instance, it is reasonable to deem that the Plaintiff was aware of the fact that it was difficult to discover taxation requirements by forging false facts about the use of the instant real estate, and that there was a tax reduction by evading the obligation to pay capital gains tax on the Plaintiff. Therefore, it is reasonable to deem that such act constitutes an under-reported case due to an unlawful act, and that the portion of unfair under-reported penalty

Examining the reasoning of the lower judgment in light of the relevant legal principles and evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine on the meaning of “unlawful or other unlawful act” in the crime of tax evasion, contrary to what is alleged in the grounds of appeal.

4. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Sang-ok (Presiding Justice)