In cases where the amount of interest income collected falls short of the principal due to the occurrence of a cause not to recover the principal and interest of a loan before the final return on tax base on interest income from a non-business loan or before determination or correction of tax base and amount of tax, whether the interest income collected in the taxable year prior to the occurrence of a cause not to recover (negative), and whether a cause not to recover the principal and interest of the loan occurred (=when a final return on tax base or tax base and tax amount are determined

If the amount of interest income collected during the taxable year prior to the occurrence of a cause for recovery of the principal and interest income accrued prior to a final return on the tax base of interest income from a non-business loan or prior to the determination or revision of tax base and tax amount falls short of the principal, such interest income shall not be subject to the interest income tax, and the determination of whether a cause for recovery of all or part of the principal and interest income accrued shall not be based on the time when the interest income accrues, but on the basis of the time when the final return on tax base or tax base and tax amount are determined or corrected. The determination of the cause for recovery impossibility shall be made objectively in accordance with ordinary social norms, comprehensively taking into account the specific details

Article 39(1) and (4) (see current Article 39(6)) of the former Income Tax Act (Amended by Act No. 9897, Dec. 31, 2009); Article 45 subparag. 9-2, 51(7), and 55(2)1 and 2 of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 22034, Feb. 18, 2010)

Supreme Court Decision 2010Du9433 Decided June 28, 2012

Plaintiff (Law Firm Gyeong, Attorneys Lee Gyeong-chul et al., Counsel for plaintiff-appellant)

The head of Yangcheon Tax Office

Seoul High Court Decision 2012Nu19702 decided February 21, 2013

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

In full view of the adopted evidence, the lower court acknowledged the following facts: (a) on September 1, 2005, the Plaintiff lent KRW 700,000 to the Hongwon Ginseng Production Center (hereinafter “redred Red Ginseng”); (b) on October 4, 2005, leased KRW 17,500,000 to the Hongwon Ginseng again as a fee; and (c) on October 4, 2005, the Plaintiff received KRW 25,000,000 as a fee; and (d) determined that the Plaintiff’s total sum of the above fees paid from Hongwon Ginseng constituted interest income of the Plaintiff.

The plaintiff's ground of appeal is that the plaintiff introduced the plaintiff to Red Ginseng only received fees, and the decision of the court below is erroneous, although the plaintiff did not receive fees. However, this is merely an error in the selection of evidence or fact-finding belonging to the exclusive authority of the court below, which is a fact-finding court, and thus cannot be a legitimate ground of appeal. Furthermore, even if the judgment of the court below is examined in light of the records, it did not err by exceeding the bounds of the principle

2. Regarding ground of appeal No. 2

A. Article 39(1) of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same) provides that “the total amount of income and necessary expenses of a resident for each year shall be the year to which the date when the total amount of income and necessary expenses are determined belongs.” Article 39(4) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010; hereinafter the same) provides that “the date when the total amount of income of a non-business loan is received shall be the date when the principal of the interest is returned according to an agreement, or when interest is paid before the date of payment of interest pursuant to an agreement, or when the amount of gross income falls short of the amount of a non-business loan collected from a debtor under Article 51(7) of the former Enforcement Decree of the Income Tax Act as the date when the debtor’s final return or revised his/her tax base pursuant to Article 50(2) of the Act cannot be collected.”

B. Comprehensively taking account of the adopted evidence, the lower court acknowledged the Plaintiff’s total of KRW 1.7 billion on September 1, 2005, KRW 50 million on October 4, 2005, and KRW 1.5 billion on February 10, 2006 as interest rate of KRW 36,00,000, KRW 259,000 on interest rate of KRW 200,000, KRW 300,000 on the interest rate of KRW 1.36,00,00, KRW 259,000, KRW 221,790,000 on 207, KRW 325,000 on 208, KRW 300,000 on 200, KRW 9,000 on 19,000 on 20,000 on 204,00 on 194,00 on 206.

Furthermore, the lower court, based on the premise that the issue of whether the interest claim is impossible to be collected should be determined on the basis of the receipt time as at the time when the income tax liability was established, and determined that the Plaintiff’s disposal of the principal and interest income of KRW 527,00,00 was lawful on the ground that, in light of the circumstances where the Hong ginseng operated the business normally as at April 5, 2007 and paid the Plaintiff about KRW 527,00,000 to the time of April 11, 2008, and that the Plaintiff’s loan principal and interest claim is deemed to be sufficiently recoverable from each of the above collateral, and that the Plaintiff’s disposal of the principal and interest income of KRW 206,000,000,000,000,000,000,000,000 won, which had already been realized on or around April 5, 207, 2007.

C. However, we cannot agree with the judgment of the court below for the following reasons.

(1) The legislative purport of Article 45 subparag. 9-2 and Article 51(7) of the former Enforcement Decree of the Income Tax Act is to consider interest income paid from a non-business loan as fixed and deemed subject to income tax. However, even if interest was paid, where special circumstances exist to deem that it is objectively evident that the claim for the loan becomes impossible to recover due to the debtor’s bankruptcy, etc., and that future interest income becomes unlikely to be realized, it shall not be subject to interest income tax (see, e.g., Supreme Court Decision 2009Du13160, Sept. 8, 201). Accordingly, Article 51(7) of the former Enforcement Decree of the Income Tax Act provides that the method of calculating the amount of interest income where the claim for the loan of the principal and interest income at the time of determination and correction of the final return on tax base or tax base and amount of tax can not be determined separately from the final return on tax base and amount of interest income received prior to such determination or determination based on circumstances under Article 55(2) subparag. 1 or 2-3’s.

(2) According to the facts established by the court below and the evidence duly admitted by the court below, ① Red Ginseng was suspended from its current account transaction on December 12, 2005; on April 22, 2008, the auction on its holding assets was commenced; on March 30, 2009, immediately after each disposition of this case, it was closed ex officio by the head of a permanent tax office on permanent residence; ② Red Ginseng or Non-Party 1, on December 12, 2006, Non-Party 2 (the maximum bond amount of KRW 50 million), Non-Party 3 (the maximum bond amount of KRW 65 billion); on April 2, 2007, Non-Party 1, Non-Party 2 (the maximum bond amount of KRW 100 million); on August 2, 2007, Non-Party 207, Non-Party 1, Non-Party 700 billion won (the maximum bond amount of KRW 2.100 million); on the other real estate owned by the plaintiff, the remaining 16.

In light of the above facts in light of the legal principles as seen earlier, since Red Ginseng or Nonparty 1 appears to have no sufficient means to repay a large amount of debt to creditors including the Plaintiff even as of March 19, 2009, when each of the dispositions of this case was taken, there is a lot of room to deem that the Plaintiff’s claim for the principal and interest of the loan was objectively obvious that it was impossible to recover the entire amount at the time of each of the dispositions of this case. In this case, the Plaintiff’s total amount of interest collected by the Plaintiff up to the time of each of the dispositions of this case exceeds KRW 1,142,190,000 (= KRW 336,00,000 + KRW 221,790,000 + KRW 325,000,000 + KRW 325,000,000,000,000 won as to the principal and interest of the Plaintiff’s loan, and thus, it should be deemed that the Plaintiff agreed to increase the principal and interest income of this case.

(3) Nevertheless, solely on the grounds stated in its reasoning, the lower court determined that the Plaintiff’s claim for the loan cannot be deemed as objectively evident cases that it was impossible to collect the principal and interest income, and that the obligation to pay interest income accrued from the non-business loan already realized before the occurrence of the cause, based on the time when the interest was received even if the cause for impossibility of recovery occurred, cannot affect any other liability to pay the interest income. It is erroneous in the misapprehension of the legal doctrine on the profits of non-business loan and the calculation of gross income amount under Articles 45 subparag. 9-2 and 51(7) of the Enforcement Decree of the Income Tax Act, thereby failing to exhaust all necessary deliberations, thereby adversely affecting

Supreme Court Decision 2001Du8490 Decided May 27, 2003 and Supreme Court Decision 2005Du5437 Decided October 28, 2005 cited by the court below are related to matters prior to the enactment and enforcement of Article 51(7) of the former Enforcement Decree of the Income Tax Act, and thus, it is inappropriate to rely on this case.

3. Conclusion

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Poe-young (Presiding Justice)