Daejeon District Court-2017-Gu Group-10096 ( October 26, 2018)

Cho Jae-2016- Daejeon-2722 ( October 20, 2017)

Whether the use of land is prohibited or restricted by statutes.

Since the land of this case cannot be deemed to have been specifically prohibited or restricted beyond the ordinary limit according to its use, it constitutes land for non-business use since it cannot be deemed to constitute land prohibited or restricted by statutes.

Article 168-14 of the Enforcement Decree of the Income Tax Act

2018Nu11942 Revocation of disposition, etc. of imposition of capital gains tax

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○ Head of tax office

June 28, 2018

April 17, 2019

May 15, 2019

1. The plaintiff's appeal is dismissed.

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

The judgment of the first instance shall be revoked. On December 3, 2015, the part of the Defendant’s imposition of capital gains tax of KRW 100,000,000 on the Plaintiff for the year 2014, which exceeds KRW 10,000,000, shall be revoked.

1. Facts of recognition;

A. Circumstances such as the Plaintiff’s acquisition and transfer of land

1) On March 28, 2005, the Plaintiff completed the registration of transfer of ownership in its name with respect to ○○○○○○○ ○○○○○ ○○ ○00 square meters (the part of 3,000 square meters in the same Dong prior to the division, but the remaining 00 square meters were divided into ○○,00 square meters, and the divided 403-6 land was divided into ○○ ○; hereinafter “instant land”). On November 21, 2006, the Plaintiff sold 611 square meters in the instant land to AA on KRW 2,075,70,000 after the division of the instant land and KRW 310,00,000, and received the remainder of 1,000 square meters in the instant land from December 28, 2009 excluding the purchase price of KRW 1,00,000,0000, the Plaintiff received the registration of transfer of ownership from A 3014,714,201, etc.

2) The instant land cultivated by ○○ from around 2008 to around 2012. The Plaintiff was engaged in real estate leasing business, housing construction and sales business, and cosmetics wholesale and retail business, etc. after the acquisition of the instant land until the transfer thereof.

B. Progress of an urban development project adjacent to the instant land

1) With respect to an urban development project for the ○○○○○ and ○○ District including the instant land, an urban development zone was designated and published on October 10, 2008, and the housing construction project plan was approved on June 11, 2013, and the apartment construction was commenced around that time. The apartment construction project for the said project was completed around December 23, 2016.

2) On January 11, 2012 with respect to the ○○○○○ and ○○○ area including the instant land, there was a designation and announcement of land scheduled for replotting on January 11, 2012. In this case, the instant land was included in two block 1 block collective land substitution, and was smaller than 1,453 square meters on the surface of the land substitution. As the instant apartment construction was completed, a land substitution disposition notice was issued on February 6, 2017 on the instant land, etc.

C. Circumstances such as imposition of capital gains tax on the Plaintiff

1) On December 31, 2014 following the transfer of the instant land, the Plaintiff calculated capital gains tax by applying the special deduction for long-term possession (Article 95(2), 106, 38,409 of the Income Tax Act) to the calculated tax amount (8,954,240 won) after deducting the special deduction for long-term possession from gains on transfer (Article 95(2), 106, 38,409 of the Income Tax Act).

2) After conducting an investigation into the capital gains tax reported by the Plaintiff, the Defendant: (a) did not cultivate the instant land; (b) cultivated the instant land by ○○○; and (c) determined that the instant land constitutes land for non-business use; (b) denied all of the special deduction for long-term possession and exemption from capital gains tax on farmland substitute land; and (c) decided and notified the Plaintiff of KRW 144,735,880, which reverts to the Plaintiff on December 3, 2015 (hereinafter “instant disposition”).

3) The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on July 6, 2016, but the appeal was dismissed on June 20, 2017.

[Reasons for Recognition] Unsatisfy, Gap evidence 1 through 5 (if there are provisional numbers, including each number; hereinafter the same shall apply), Eul evidence 1 through 10, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

Inasmuch as the instant land was designated as a land scheduled for replotting on January 11, 2012 and the disposition of replotting was publicly announced on February 6, 2017, the Plaintiff could not use the instant land during the same period pursuant to Article 36(1) of the Urban Development Act. Therefore, the instant land cannot be deemed to be used as land for non-business purposes under Article 104-3(2) of the former Income Tax Act (amended by Act No. 12852, Dec. 23, 2014; hereinafter the same shall apply) and Article 168-14(1)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26067, Feb. 3, 2015; hereinafter the same shall apply) for non-business purposes from the date of designation to the date of transfer of the Plaintiff (from January 11, 2012 to October 13, 2014; hereinafter the instant land shall not be deemed to be used as land for non-business purposes during the period of up to 13 years 10.

B. Relevant statutes

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

C. Determination

1) As seen in the above facts, the instant land was cultivated by ○○ from around 2008 to 2008, and since the Plaintiff did not cultivate it, it is recognized that the said land is a non-business land satisfying the requirements of Article 104-3(1)1 (a) of the former Income Tax Act and Article 168-6(1) of the former Enforcement Decree of the Income Tax Act.

2) However, even if a disposition to designate land as a reserved land for replotting was taken on January 11, 2012 with respect to the instant land, it is insufficient to recognize that the instant land constitutes the grounds for exception to non-business land under Article 104-3(2) of the former Income Tax Act from January 11, 2012 to October 13, 2014, and Article 168-14(1)1 of the former Enforcement Decree of the Income Tax Act. The reasons are as follows.

A) First, it is difficult to readily conclude that the instant land satisfies the requirements of Article 168-14(1)1 of the former Income Tax Act solely on the ground that the use of the land is restricted pursuant to Article 36(1) of the Urban Development Act due to the disposition of designating the land as a planned land substitution on January 11, 2012, but the restriction on the use and profit-making of the previous land in an urban development project by collective land substitution method is performed only to the extent that it does not hinder the implementation of

(1) “Land, the use of which is prohibited or restricted pursuant to the former Enforcement Decree” under Article 168-14(1)1 of the Income Tax Act refers to land, the use of which is specifically restricted beyond the ordinary limit according to its use. In such cases, whether it constitutes “where the use is specially restricted beyond the ordinary limit according to its use” shall be based on the principle of whether it is limited according to its original use. However, the purpose of acquisition of the land, actual use status, possibility of changing its original use, etc. shall also be determined individually (see, e.g., Supreme Court Decision 2010Du18543, Oct. 24, 2013).

(2) An urban development project by collective replotting means an urban development project by replotting method pursuant to Article 27(9) of the Enforcement Rule of the Urban Development Act and a construction project of aggregate buildings (in particular multi-family housing), so that a separate project operator selected by an implementer of an urban development project can immediately implement an aggregate building on a group of land created by the implementation of an urban development project. On the other hand, a landowner of the previous land can allocate a group of co-ownership shares in the land and sell such shares to an implementer of an aggregate building or sell such shares to purchase a newly-built house. According to Articles 35(1), 36(1), 42(1), and 42(6) of the Urban Development Act, the statutory alteration of rights, such as extinguishment of rights to the previous land and acquisition of rights to replotting, takes place through a replotting plan, and such land cannot be used and profit-making until a replotting plan is publicly announced under the replotting plan. As such, it is reasonable to deem that a landowner is not entitled to a collective replotting plan within the scope of a pre-determined land to be used or profit-making shares.

(3) Therefore, in light of the fact that there was no urban development project that practically limits the use and profit-making of the instant land, including apartment construction, on the instant land for more than one year from the disposition of the designation of the reserved land for replotting, and that ○○○ was cultivated by using the instant land as farmland in January 11, 2012, it is difficult to view that there was a prohibition or restriction of the use under the statutes stipulated in Article 168-14(1)1 of the former Enforcement Decree of the Income Tax Act solely on the disposition of the designation of the reserved land for replotting on January 11, 2012.

B) Next, even if Article 36(1) of the Urban Development Act is a prohibition or restriction of use under the laws and regulations stipulated in Article 168-14(1)1 of the former Enforcement Decree of the Income Tax Act, it is difficult to view that Article 104-3(2) of the former Income Tax Act, which is an exception to the land for non-business use, can be applied to the land

(1) A special deduction for long-term holding is a system that grants a kind of tax benefit to taxpayers by inducing a long-term holding of real estate to calculate capital gains subject to tax by deducting a specific amount specially from gains on transfer of assets in order to restrain real estate speculation and facilitate efficient utilization of land. However, since land for non-business is land owned by an individual as a means of property increase rather than using it for a productive purpose according to the actual demand, special treatment under tax law, such as excluding or restricting special deduction for long-term holding or increasing capital gains tax rates, is allowed pursuant to Article 122 of the Constitution that an individual may impose necessary restrictions and obligations on land for efficient and balanced utilization, development and preservation of land. Article 95 of the former Income Tax Act excludes special deduction for long-term holding of land for non-business purposes, thereby suppressing the demand for speculation of land.

(2) Article 104-3 (2) of the former Income Tax Act and Article 168-14 (1) 1 of the former Enforcement Decree of the Income Tax Act provide that the land shall not be deemed the land for non-business purposes, in extenuating circumstances where the use of the land is prohibited or restricted pursuant to the laws and regulations after acquiring the land. As such, if the land falls under the land for non-business purposes, it shall not be deemed the land for non-business purposes, unless the use is prohibited or restricted pursuant to the laws and regulations, but the land shall not be deemed the land for non-business purposes." Furthermore, the special deduction for long-term holding under the Income Tax Act has a legislative purpose to restrain real estate speculation and promote efficient use of the land, and Article 104-3 (2) of the former Income Tax Act provides for exceptions to the land subject to special deduction for long-term holding, which is subject to the exclusion of the special deduction for non-business purposes, it shall be determined in full view of the legislative purpose and purpose of the prohibition of the use of the land.

(3) However, as seen earlier, the Plaintiff had allowed ○○○ to cultivate the instant land after purchasing the instant land, which is farmland, after 2008, and did not find any trace of making efforts to cultivate the instant land by itself (i.e., the Plaintiff had been cultivated or planned to cultivate the instant land, and does not necessarily have a farming plan, regardless of whether the instant land was designated as reserved land or not). Rather, the Plaintiff engaged in various projects that are irrelevant to the farming company, and among them, included business types of acquisition and transfer of the instant land as means of property increase, such as real estate leasing business, housing construction business, and sales business, and so on. Moreover, it seems reasonable to view that the Plaintiff did not have any specific reason to impose restrictions on the instant land use of the instant land solely on the grounds that it did not go against the purpose of Article 16 of the Urban Development Act, by taking account of the fact that most of the Plaintiff had been paid the instant land by no later than December 28, 2006, by taking account of the fact that there were no specific reasons for the instant land use of the instant land.

3) Therefore, we cannot accept the Plaintiff’s assertion that the instant land constitutes an exception to the non-business land from January 11, 2012 to October 13, 2014.

3. Conclusion

If so, the plaintiff's claim shall be dismissed as it is without merit. The judgment of the court of first instance shall be concluded.

B. The plaintiff's appeal is just and is dismissed as it is without merit.