Suwon District Court-2017-Gu Partnership-2319 ( November 27, 2018)

A certificate of non-collectionable claim admission;

Although the existence and amount of unpaid bonds are asserted based on the total value of supply and value-added taxes on the total tax invoice, it is difficult to view that the existence and amount of unpaid bonds asserted by the Plaintiff were specifically proven solely on the evidence

Article 114 of the Income Tax Act

2018Nu78680 Revocation of Disposition Rejecting Value-Added Tax Correction

AA Corporation

[Defendant-Appellee]

○ Head of tax office

Suwon District Court Decision 2017Guhap2319 Decided November 27, 2018

April 25, 2019

May 16, 2019

1. The part of the claim extended by this court among the lawsuit in this case shall be dismissed.

2. Of the judgment of the court of first instance, the part against the plaintiff falling under the disposition ordering cancellation shall be revoked.

The Defendant’s rejection of filing an application for rectification of value-added tax for the second period of February 20, 2012 against the Plaintiff on February 20, 2017

(00,000,000 won) shall be revoked.

3. The plaintiff's remaining appeal is dismissed.

4. 80% of the total costs of litigation shall be borne by the Plaintiff, and 20% shall be borne by the Defendant.

1. Purport of claim

On February 20, 2017, the Defendant’s revocation of the rejection disposition on the deduction of bad debt tax amount listed in attached Table 1 at the first instance court, but the Defendant’s revocation of the rejection disposition on the deduction of bad debt tax amount of KRW 0,000,00 among the rejection disposition on the claim for correction against KRW 2,138,675,203, and KRW 0,000 among the rejection disposition on the claim for correction against KRW 00,00,000 for the first half-year value-added tax in 2012, the amount exceeding KRW 00,000 among the rejection disposition on the claim for correction against KRW 0,000 for the second half-year value-added tax amount of KRW 2,00,000, and the Plaintiff’s revocation of the rejection disposition on the claim for correction against KRW 2,200 for the second half-year value-added tax amount of KRW 201, and the claim for correction was amended to the second half-year portion.

2. Purport of appeal

The decision of the first instance court is revoked. The defendant's revocation of the decision of February 20, 201 as to the plaintiff on February 20, 2017 exceeds KRW 0,000,000,000 among the disposition of refusal of correction as to the amount of value-added tax 0,000,000,000 among the disposition of refusal of correction as to the amount of value-added tax 00,000,000 for the first half year of 201, and the part exceeding KRW 00,000,000 among the disposition of refusal of correction as to the amount of value-added tax 0,00,000 for the second half year of 20, 2012 is revoked (the purport of appeal has also been reduced to the extent that the purport of appeal is reduced by reducing the claim of correction as to the amount of value-added tax 0,000,00

1. Details of the disposition;

A. The Plaintiff is a corporation that runs civil engineering and construction business.

B. On January 10, 2017, the Plaintiff filed a request for correction with the Defendant for the deduction of each amount stated in attached Table 1 as bad debt tax amount on the ground that the extinctive prescription of each of the construction work claims stated in attached Table 1 has expired, on the grounds that the construction work claims provided and not recovered in the name of each company was completed. The Defendant rejected the Plaintiff’s request for correction on the ground that “the details of the supply of goods and services and the fact of bad debt occurrence” on February 20, 2017, it is difficult to objectively confirm the fact of bad debt occurrence” (hereinafter referred to as “the disposition of this case”), and thus, the Plaintiff rejected the Plaintiff’s request for correction on the ground that the Plaintiff’s request for correction was rejected (excluding the part concerning the disposition of refusal of the above request for correction) (hereinafter referred to as “the part concerning the part concerning the AA development as of February 20, 2012).

C. On May 25, 2017, the Plaintiff filed an appeal with the Tax Tribunal on May 25, 2017, but was dismissed on September 26, 2017.

[Ground of recognition] Facts without dispute, Gap evidence 1 through 4, 6, 7 (including each number; hereinafter the same shall apply) and the purport of the whole pleadings

2. Summary of the plaintiff's assertion

The Plaintiff’s each of the instant business entities as indicated in attached Table 2 (hereinafter “instant unpaid claim”) falls under “a claim which cannot be recovered by loss” under the Value-Added Tax Act for the following reasons, and thus, the bad debt tax amount should be deducted. Nevertheless, the instant disposition against which the Plaintiff’s claim for the deduction of bad debt tax amount was rejected is unlawful.

A. The Plaintiff provided construction works to each of the instant trading enterprises except for AA development and failed to recover construction cost, and the three-year short-term extinctive prescription period for each of the instant outstanding claims was completed between February 2, 2011 and February 2012.

The extinctive prescription of the Plaintiff’s claim against AA development among the unpaid claims in the instant case was interrupted on or around September 2009, but the extinctive prescription was completed on or around September 2012 after the lapse of three years from that time.

Each unclaimed claim of this case constitutes a bad debt which can not be recovered upon completion of the extinctive prescription as above.

B. Each claim against AA Industry Development and CCC out of the outstanding claims in the instant case constitutes a claim which cannot be recovered due to the discontinuation of the business.

3. Relevant statutes;

The written judgment of the first instance court (attached Form 2) shall be as stated in the "related Acts and subordinate statutes".

4. Determination as to the legitimacy of the part of the claim extended by the court among the lawsuit of this case

The tax authority upon receipt of a request for rectification is obligated to investigate and confirm whether the tax base and amount recorded in the tax base return exceed the objectively legitimate tax base and amount to be reported under the tax-related Acts. Therefore, the subject of adjudication in a lawsuit seeking revocation of a request for rectification is an objective existence of the tax base and amount of tax recorded in the tax base return, as in the ordinary lawsuit seeking revocation of the tax disposition (see Supreme Court Decision 2010Du13425, Jun. 28, 2012

Therefore, even though a taxpayer only contests the tax base and amount of tax originally declared and paid at the time of filing a request for correction and a tax appeal, the tax authority shall not be tanging with it, and shall examine and determine whether the tax base and amount of tax recorded in the return of tax base exceed the legitimate tax amount as a whole, and the taxpayer may contest the whole amount of tax declared and paid when the revocation lawsuit is brought against the Plaintiff’s request for correction. However, even in such a case, the Plaintiff’s claim for revocation is a rejection disposition against the Plaintiff’s claim for correction of the tax base and amount of tax initially filed and paid, and it is unlawful to seek revocation against the rejection disposition for revocation of the claim for correction as to the whole amount of the value-added tax declared and paid by the Plaintiff exceeding the amount of tax initially filed and filed in excess of the amount of tax requested by the Plaintiff’s request for correction (in addition, if the purport of this decision is to order the correction disposition for the whole amount of tax declared and paid by him/her

The plaintiff sought revocation of the rejection disposition of the claim for correction against the value-added tax amounting to 00,000,000 for the second half of 2012, but sought revocation of the rejection disposition of the claim for correction against the value-added tax amounting to 0,000,000.

However, on January 10, 2017, at the time of filing a claim for correction with the Defendant, the Plaintiff asserted only the above part while seeking deduction of KRW 91,932,730 of the bad debt tax amount of value-added tax for the second term of 2012. Accordingly, the Defendant’s refusal of the above request for correction on February 20, 2017 is as seen earlier. Accordingly, there is no refusal disposition by the Defendant regarding the portion exceeding the above KRW 00,000 of the value-added tax reported and paid for the second term of 20,000 among the value-added tax reported and paid by the Plaintiff.

Therefore, the part of the claim extended by this Court among the lawsuits in this case (the part exceeding the above 00,000,000 won among the disposition of refusal to correct the value-added tax for the second period of 200,000,000) is unlawful as it seeks revocation of the non-existent disposition.

5. Determination on the legitimacy of the instant disposition

A. Whether the extinctive prescription expires

1) Relevant legal principles

Article 17-2(1) of the former Value-Added Tax Act (amended by Act No. 11608, Jan. 1, 2013; hereinafter referred to as the "former Value-Added Tax Act") provides that "If bad debt is not recoverable due to the whole or part of sales bonds due to the bankruptcy or compulsory execution of a supplier or other causes prescribed by Presidential Decree, the bad debt tax may be subtracted from the output tax amount in the taxable period to which the date when the bad debt becomes final and conclusive belongs." Article 63-2(1) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 24359, Feb. 15, 2013; hereinafter referred to as the "former Enforcement Decree of the Value-Added Tax Act") provides that Article 19-2(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 24357, Feb. 15, 2013; hereinafter referred to as "former Enforcement Decree of the Corporate Tax Act").

Meanwhile, in a case where several monetary obligations exist due to a continuous monetary transaction between the same parties, as long as a partial repayment of an obligation is made as part of the obligation, the repayment of the obligation ought to be deemed to take effect by the division of prescription as to the whole obligation. In this case, if an obligor partly pays out the insufficient amount of obligation, barring any special circumstance, it shall be deemed that the obligor has discharged the entire amount of obligation with the approval of the entire amount of obligation (see Supreme Court Decision 78Da1790, May 31,

2) Whether the extinctive prescription of outstanding bonds issued by any other trader except for AA development has expired

In light of the following circumstances, each of the aforementioned evidence, evidence Nos. 8, 10, and evidence Nos. 1 and 5, the extinctive prescription was interrupted between April 2010 and July 201.

A) From around 2008 to 2011, the Plaintiff entered into several contracts for construction works with each of the instant transaction parties, and had a number of claims for the construction payment accordingly.

B) The Customer Director (Evidence No. 5) prepared by the Plaintiff explicitly states the increase or decrease in the amount of the construction payment in relation to the claim for the said construction payment. According to this, each of the instant transactional parties appears to have repaid the Plaintiff part of the construction payment until September 2009, AAA Development by April 201, CCC by July 201, BB Construction by July 201, and B by July 201.

C) The Plaintiff alleged that the Defendant’s repayment as a ground for interruption of prescription was paid as part of the claim for construction payment that existed prior to the occurrence of each of the instant unpaid claims. However, there is no evidence to acknowledge this. Rather, the Plaintiff stated, through the preparatory document dated August 6, 2018, that each of the instant unpaid claims was incurred due to the Gwangju 2 District AABB Loan Construction (related to the A industry development), Posidong 2 AABB Loan Construction (related to the BB Construction), Posidong Posidong 2 AB BBB Loan Construction (related to the BB Construction), Posidong Posidong Posidong 2, and 00 BCC Construction (related to the CCC). In light of these circumstances, all of the pertinent construction names are indicated in the customer’s president. In light of these circumstances, the Plaintiff’s aforementioned work names are indicated.

Money may be fully recognized as being paid out of part of each outstanding claim in this case.

(Omission of List)

D) As such, each of the instant transaction companies was repaid to the Plaintiff as part of the amount insufficient to repay the entire amount due to the continuous construction contract, and thus, barring any special circumstance, it can be deemed that the Plaintiff approved the entire amount of the existing construction price obligations, including each of the instant unpaid claims.

3) Whether the extinctive prescription of outstanding claims for AA development has expired

Among the unpaid claims in this case, the fact that the Plaintiff’s claims against AA Development were partially repaid by September 2009 is as seen earlier, and thus, the running of the extinctive prescription was interrupted. However, if the non-exercise of rights continues after the interruption of prescription, the new prescription period has run from that time. As such, it is apparent that three years have elapsed from September 2009 to September 2012, the extinctive prescription period of the Plaintiff’s unpaid claim against AA Development was expired and expired around September 2012.

As to this, the defendant asserts that the plaintiff had been continuously repaid the unpaid claim from AA Development from September 2009 to November 2015, and that the interruption of prescription by approval of the debt has re-exploited.

According to Gap evidence Nos. 5 and Eul evidence Nos. 5, the fact that the plaintiff received repayment of KRW 1,029,771,385 in total from December 10, 2009 to November 12, 2015 is recognized as follows.

(Omission of List)

However, the extinctive prescription of the instant unpaid claim against AA development, which constitutes a claim for construction price due to partial repayment of the above loan claim, cannot be interrupted. The Defendant’s defense is without merit.

Furthermore, the defendant asserts that although there was KRW 000,000,000 of the sales of AA development during the first taxable period in 2010, the extinctive prescription of this case became complete because the plaintiff did not make any effort to recover claims, this only constitutes the waiver of claims against a related party, and thus, it cannot be deemed as bad debts.

According to the evidence Nos. 10-1 through 3, AA Development may recognize the fact that a sum of KRW 187,174,270 is included in the total amount of one term portion in January 2010, and the fact that the Plaintiff did not take measures to preserve claims, such as provisional attachment, against the above sales claims, does not conflict between the parties.

On the other hand, according to the purport of the evidence No. 8 and the argument No. 74,21,152 of AA Development’s assets as of the end of the 2010 business year, and assets as of the end of the 2011 business year are merely KRW 00,00,000, and AA Development’s net loss in the business year 2010 and KRW 0 billion in the business year 201 can be acknowledged.

In such a situation, the Plaintiff collected the outstanding loan claims from AA Development, from September 2009, and from October 18, 2010, collected KRW 145 million loan claims, and thereafter collected additional loan claims of KRW 154,771,385 up to November 12, 2015.

Therefore, even though the Plaintiff continued to recover the claims from AA development after September 2009, the Plaintiff was unable to additionally recover the unpaid claims due to the lack of assets in AA development. Therefore, it cannot be deemed that the Plaintiff renounced the claims by delaying the collection of the unpaid claims. The Defendant’s assertion is groundless.

4) Sub-committee

The Plaintiff’s non-refluent claims against AA Industry Development, BB Construction, and CCC were all interrupted from April 201 to July 201. Thus, the Plaintiff’s assertion on this part that is premised on the completion of the extinctive prescription of each non-refluent claim is without merit.

Since the Plaintiff’s unpaid claim against AA development expired by the expiration of the extinctive prescription on September 2012, this part of the Plaintiff’s assertion is with merit.

(b) Whether claims are not collectible due to the discontinuation of business.

1) Relevant legal principles

Article 17-2 (1) of the former Value-Added Tax Act, Article 63-2 (1) of the Enforcement Decree of the same Act, and Article 19-2 (1) 8 of the former Enforcement Decree of the Corporate Tax Act recognize a bad debt tax deduction under the Value-Added Tax Act with respect to "bonds which cannot be recovered due to the debtor's bankruptcy, compulsory execution, execution of punishment, discontinuance of business, death, disappearance, or missing." Since the bad debt tax deduction system is an exceptional system for preventing the taxpayer's economic loss, the taxpayer must assert and prove that the taxpayer has bad debt tax in order to receive the value-added tax after applying for the deduction of bad debt tax.

2) In the instant case:

In full view of the purport of Gap evidence No. 9 and all the arguments, the facts of the closure of the AA industry around October 10, 201 and the CCC around November 29, 201 are acknowledged. However, in light of the following circumstances acknowledged by comprehensively taking into account each of the aforementioned evidence, Gap evidence Nos. 11, 13, 14, and Eul evidence Nos. 7 through 9 and the overall purport of the arguments, the evidence submitted by the plaintiff alone cannot be deemed as having caused a bad debt, which objectively confirmed the impossibility of collecting all the claims for the construction price of the AA industry and the CCC among each of the non-refilled claims in this case. The plaintiff's assertion in this part is without merit.

A) At the time of 2009, AA Industry Development was in a state of complete capital erosion with its liabilities of KRW 00,000,000,000 as assets, and its liabilities of KRW 00,000,000,000,000 as assets. Meanwhile, the tax authority had filed a lawsuit seeking revocation of a fraudulent act against the Plaintiff’s repayment of loans as of March 26, 2010 with the value-added tax claim of KRW 200,000,000,000. On the other hand, the tax authority dismissed the claim of the Seoul High Court for revocation of a fraudulent act on the ground that the repayment of loans as of March 26, 2010 was in a state of excess of the obligation by the court of the first instance (U.S. District Court Decision 2013hap20946, the appellate court, which was a value-added tax claim of KRW 201,000,00,000.)

However, as of October 201, when a business was discontinued, AAA industry development owned a building with 00,000 square meters and above-ground buildings, which had been promoted for a new apartment construction project at the time of the discontinuance of the business. The auction procedure for the above site and above-ground buildings, which had been conducted for the first bidding amounting to KRW 00,000,000,000. Therefore, it cannot be deemed that at the time of October 201, the collection was impossible or that the amount of recovery was objectively determined to the extent that it could be specified.

B) CCC was in a state of complete capital erosion in total amount of KRW 00,000,000,000 for total assets in 2008, and total amount of KRW 00,000,000 for total assets in total amount of KRW 00,000,000 for total assets.

However, total assets have been increased by or similar to KRW 00,00,000,000 in 2009, and KRW 00,000,000,000 in 2010, and KRW 000,000 in 2011,000,0000. In addition, the Plaintiff was unable to discontinue its business and was paid some of the unpaid claims (0,000,000) in a manner that CCC received a refund of national tax from the tax authorities around June, 2010 by transfer of a national tax refund claim from the tax authorities around 2010. In light of such circumstances, the evidence submitted by the Plaintiff cannot be readily concluded that the instant unpaid claims against CCC were impossible or impossible at the time of its business closure.

C. Sub-committee

Since the Plaintiff’s unpaid claim against AA development terminated by the expiration of the extinctive prescription on September 2012, the amount of bad debt tax of KRW 1,374,381,548 should be deducted from the output tax amount of value-added tax for the second period of value-added tax in 2012. Of the instant disposition, the disposition rejecting the second period of value-added tax in 2012 is unlawful, and thus, should be revoked. The remainder of the instant disposition is legitimate.

6. Conclusion

Of the instant lawsuit, the part of the claim extended by the court is unlawful and thus dismissed.

The part concerning the value-added tax for the second period of 2012 among the plaintiff's claims is justified, and the remaining claims shall be dismissed as it is without merit. Since the judgment of the court of first instance is unfair with some different conclusions, the part against the plaintiff, which constitutes the disposition ordering revocation as above in the judgment of the court of first instance, shall be revoked. The remaining part of the judgment of the court of first instance is just in conclusion, and thus, the remaining appeal by the plaintiff is dismissed as