In a case where a tax investigation was conducted for an unlawful purpose, not for the original purpose of collecting taxation data or verifying the accuracy of the details of the report, whether the taxation disposition based on the taxation data collected by the tax investigation is unlawful (affirmative)

Article 81-4(1) of the Framework Act on National Taxes provides, “Tax officials shall conduct a tax investigation to the minimum extent necessary to realize appropriate and fair taxation, and shall not abuse their authority of investigation for any other purpose.” This provision provides for the legitimate requirements of a tax investigation, objective necessity, minimum level, prohibition of abuse of authority, etc. This is to achieve the principle of a rule of law in the field of the tax procedure. It has a specific legal effect as a matter of itself. Therefore, if a tax investigation is conducted for an unlawful purpose, not for the original purpose of verifying the accuracy of the details of taxation data collection or return, it constitutes an unlawful cause for a tax investigation, and a taxation disposition based on the taxation data collected by such tax investigation is also unlawful. It is unnecessary to collect or verify the accuracy of the details of taxation data as a kind of administrative investigation to realize the State’s right to taxation, and ultimately, even if a tax investigation does not perform an important function to prevent the omission of taxation and to ensure the taxpayer’s good faith and to prevent any abuse or misuse thereof, it would result in infringing the taxpayer’s business activity or privacy, and ethics and neutrality of ethics.

Article 59 of the Constitution, Article 170 of the Income Tax Act, Article 122 of the Corporate Tax Act, Article 74 of the Value-Added Tax Act, Article 81-2(2)1 of the Framework Act on National Taxes, and Article 81-4(1)

[Judgment of the court below]

Head of Seocho Tax Office

Seoul High Court Decision 2015Nu57408 decided July 13, 2016

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

1. Case history

A. From September 6, 2012 to December 4, 2012, the director of the Seoul Regional Tax Office conducted an integrated investigation of corporate tax with respect to a dialogue precise chemical company (hereinafter “instant company”), and confirmed that Nonparty 1 trusted 1,009 shares of the instant company owned by him to the Plaintiff on December 31, 2004, and notified the Defendant of taxation data. Accordingly, on November 7, 2013, the Defendant filed an appeal with the Seoul High Court against the Plaintiff pursuant to Article 45-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax and Gift Tax Act”) upon receiving a claim from the Seoul High Court for the cancellation of the disposition (hereinafter “instant disposition”). The Plaintiff filed an appeal with the Seoul High Court against the Plaintiff on December 21, 2014.

B. (1) The lower court acknowledged the following facts in full view of the evidence admitted.

(A) From August 2009 to October 2012, Nonparty 2 served as a leader and a documentary agency in the National Tax Service’s Property Tax Real Estate Transactions Management Division, and around October 201, Nonparty 3 requested Nonparty 1 to resolve the land transaction disputes between Nonparty 1 and Nonparty 3. In order to pressure Nonparty 1 through a tax investigation, Nonparty 2 directly prepared a written report on real estate tax evasion with Nonparty 1 and Nonparty 4, a de facto spouse, and given Nonparty 5, a de facto spouse, to receive the said written report from the National Tax Service on January 30, 2012 (hereinafter “instant written report on tax evasion”). The content of the instant written report on tax evasion from Seo-gu’s address omitted, and Nonparty 1, etc. purchased Nonparty 30 and Nonparty 130,000,000 won, which is considerably lower than the market value of Nonparty 1 and Nonparty 213,000 won.

(B) On January 2012, the National Tax Service’s property tax transaction management division in the instant report was transferred to Nonparty 1 and Nonparty 4 to the Daegu Regional Tax Office and the Seoul Regional Tax Office having jurisdiction over the domicile of each resident registration. Nonparty 2, around August 2012, called the Seoul Regional Tax Office for the process of handling the instant report on the tax evasion. Nonparty 1’s resident registration address was first on Nonparty 1’s resident registration address, and Nonparty 1’s address was without jurisdiction over the Seoul Regional Tax Office, and Nonparty 1’s actual domicile was also under jurisdiction of the Seoul Gangnam-gu Seoul Regional Tax Office. Nonparty 2 believed Nonparty 2 to have applied for the jurisdiction over the tax investigation without undergoing the procedure of verifying whether Nonparty 1 actually resided in the said domicile, and approved Nonparty 2 as an intermediary decision-making, and approved Nonparty 2’s application for conciliation by the Commissioner of the National Tax Service on February 8, 2012.

(C) The Seoul Investigation Division, based on the instant report on tax evasion and the approval of the competent conciliation authority of the Seoul Investigation Division, selects companies related to Nonparty 1, including Nonparty 1 and the instant company. On August 31, 2012, the Seoul Investigation Division established a tax investigation plan on the charge of tax evasion of gift tax and the integrated investigation of corporate tax on the instant company. On September 6, 2012, the investigators affiliated with the Seoul Investigation Division conducted a tax investigation on the instant company’s office located in Ulsan Island for about three months on the commencement of seizing the relevant documents, details of passbook, etc. (hereinafter “instant tax investigation”). Nonparty 2 did not take over the instant real estate after Nonparty 1’s comprehensive tax investigation on the instant real estate transfer site, which was conducted by Nonparty 6, which was at the end of November 2012, which was at the time of the instant tax investigation, on the ground that Nonparty 1’s comprehensive tax investigation on the instant real estate transfer site, which was at the end of which Nonparty 1 had no jurisdiction over the instant real estate transfer report.

(D) Meanwhile, Nonparty 2, etc. was acquitted on May 19, 2016 on the grounds that “In the event of finding the above real estate, Nonparty 2, etc. promised to receive a bribe of KRW 1.2 billion from Nonparty 3,” and was prosecuted under the name of the crime such as violation of the Act on the Aggravated Punishment, etc. of Specific Crimes (Bribery) and the Violation of the Attorney-at-Law Act. Of them, Nonparty 2, etc., on the facts of the above bribe, on the following grounds: “The evidence submitted by the prosecutor alone, recognized that Nonparty 3 would deliver the above facts of the bribe to Nonparty 2, and prepared a delegation of authority and a letter of payment, and it is difficult to deem that there is no reasonable doubt that the expression of intent to receive a bribe is definitely consistent with that of Nonparty 2 and Nonparty 3 by preparing a letter of delegation of authority and a letter of payment.” However, the prosecutor appealed the case

(2) Examining the above facts in light of the following circumstances, the lower court determined that the instant tax investigation was conducted by abusing the authority to conduct tax investigation, and that the instant disposition was conducted based on the taxation data collected through an illegal tax investigation, and thus, should be revoked on the ground that it violates the due process doctrine, even though it does not fall under the grounds for selection of tax investigation subject to Article 81-6 of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013).

(A) The Seoul Regional Tax Office’s investigation and management division selected Nonparty 1 and the company of this case as a taxpayer on the basis of the instant report on tax evasion. The instant report on tax evasion merely stated only the details of Nonparty 1’s suspicion of tax evasion due to Nonparty 1’s acquisition of real estate at low price, and did not state Nonparty 1’s other suspicion of tax evasion and corporate tax evasion of the company of this case. After the commencement of the investigation on the instant report on tax evasion, Nonparty 1’s real estate transaction details do not constitute real estate acquisition, and thus, it was concluded that it cannot be recognized as a suspicion of tax evasion due to the acquisition of real estate at low price. Thus, the said report on tax evasion cannot be deemed to constitute “where specific information about taxpayers exists on tax evasion” under Article 81-6(2)3 of the former Framework Act on National Taxes or “where there is clear evidence to acknowledge any omission or error in the details of the tax evasion report” under subparagraph 4, and also cannot be deemed to constitute a broad tax investigation or management notice of the instant tax investigation plan.

(B) The Seoul Regional Tax Office’s investigation management department concluded that Nonparty 1 could not be acknowledged of the crime of evading gift tax due to the acquisition of real estate at a low price immediately after commencement of the investigation on the instant report on the tax evasion report, but confirmed the source of Nonparty 1’s real estate purchase price. As a result, the Seoul Regional Tax Office’s comprehensive corporate investigation into the instant company on the grounds that Nonparty 1-related companies received a large amount of money and the change of shareholders of the said companies frequent, and thus expanded the scope of the investigation by the comprehensive corporate investigation into the instant company on the grounds that it exceeded the minimum scope necessary to realize appropriate and fair taxation, and constitutes a violation of Article 81-4(1) of the former Framework Act on National Taxes.

(C) Article 5(1) of the former Regulations on the Conduct of Investigations (amended by the National Tax Service Directive No. 2105, Jun. 30, 2015; hereinafter the same) provides that “The head of a tax office or the director of a regional tax office having jurisdiction over the place of tax payment of the tax item shall conduct the tax investigation affairs: Provided, That he may conduct the tax investigation affairs deemed important by the Commissioner of the National Tax Service.” According to the above, although Nonparty 1 and the company of this case are in the domicile of Nonparty 1 and the regional tax office having jurisdiction over the head office of the company of this case (Tgu and Busan), the Seoul Regional Tax Office adjusted the jurisdiction over the tax investigation of this case to the Seoul Regional Tax Office without undergoing the procedure of confirmation only on the grounds of Nonparty 2’s statement that Nonparty 1’s actual domicile is Seoul, which does not constitute the grounds for adjustment of the tax investigation under Article 5(2) of the above Regulations. Thus, the tax investigation of this case is beyond the jurisdiction prescribed in Articles 5 and 11 of the

(D) The instant tax investigation started with the purpose of pressureing Nonparty 2, who is a public official of the National Tax Service, to pressure Nonparty 3 to get the ownership of the disputed land returned to Nonparty 1. In full view of the following: (a) Nonparty 2 participated and had Nonparty 2 conduct the tax investigation in the Seoul Regional Tax Office without jurisdiction; and (b) even with the knowledge of the fact that there was no suspicion of tax evasion as stated in the written report of tax evasion report, the tax official conducted the tax investigation for a long time by unfairly expanding the scope of the tax investigation; and (c) expressed that Nonparty 1 et al. would end up an agreement with Nonparty 3 while conducting the tax investigation for a long time, the instant tax investigation was abused for personal interest of Nonparty 3 or Nonparty 2.

C. The defendant's grounds of appeal are as follows.

(1) The lower court erred by misapprehending the legal doctrine on the selection of persons subject to tax investigation by excessively narrowly interpreting the grounds for the selection of those subject to tax investigation under Article 81-6 of the former Framework Act on National Taxes.

(2) The lower court recognized that the head of the Seoul Regional Tax Office’s investigation management and analysis team did not confirm whether Nonparty 1’s actual place of residence is Seoul and applied for the conciliation of the competent district tax office is erroneous. In conducting a tax investigation, the approval of the competent authority for a tax investigation is to enhance the efficiency of the investigation affairs, and the lower court determined that the instant tax investigation was outside the jurisdiction of the Seoul Regional Tax Office, even though it was not an exceptional one, constitutes a mistake in violation of the rules of evidence.

2. Judgment of the Supreme Court

A. The principle of a rule of law refers to the exercise of state power that is legally bound by the rule of law in accordance with the rule of law. The rule of law originally starts with the purpose of preventing the arbitrary exercise of state power. If the exercise of state power depends not on the realization of a common good but on the interest or the interest of a specific individual or group, a misuse or misuse of power occurs, and the freedom and rights of the people are easily infringed, and thus, is subject to power control. The rule of law is to ensure the impartiality, public nature, and ethics of state power. As such, all state agencies and public officials should not engage in acts contrary to the Constitution and laws, nor abuse their authority when exercising the power granted by the Constitution and laws.

The principle of a constitutional state in the field of tax law is expressed as the principle of no taxation without the law (Article 59 of the Constitution). The basic content of the principle of no taxation without the law is that tax items, tax rates, and other taxation requirements and procedures for the imposition and collection of taxes must be prescribed by the Act. A tax liability is automatically established when the taxation requirements stipulated by the Act are satisfied (see Supreme Court Decision 83Nu279, Jan. 22, 1985). However, even if a tax liability is established under the provisions of a law, the tax authority should accurately ascertain the facts constituting taxation requirements in order to ensure subsequent procedures, such as payment and collection, etc., by lawfully establishing the content thereof. In this regard, the tax law grants tax officials the authority to ask questions to taxpayers or persons concerned as necessary and to inspect related documents, books, and other articles (Article 170 of the Income Tax Act; Article 122 of the Corporate Tax Act; Article 74 of the Value-Added Tax Act).

Article 81-4(1) of the Framework Act on National Taxes provides, “Tax officials shall conduct a tax investigation to the minimum extent necessary to realize proper and fair taxation, and shall not abuse their authority of investigation for any other purpose, etc.” (hereinafter “instant provision”). The instant provision provides for the legitimate requirements of tax investigation, objective necessity, minimum and prohibition of abuse of authority, etc. This is intended to achieve the principle of a rule of law in the territory of the tax procedure law, and has a specific legal effect as it itself. Therefore, if a tax investigation is conducted for an unlawful purpose, not for the original purpose of the Act, such as the collection of taxation data or verification of accuracy of the details of the tax return, it constitutes a serious illegal cause, and a taxation disposition based on the taxation data collected by such tax investigation is also illegal. It is unnecessary for a tax investigation to verify the accuracy of the details of the taxation data collection or return, as a type of an administrative investigation to realize the State’s right to taxation, and ultimately, even if a taxpayer has faithfully filed a tax return and has faithfully secured important functions, it is not likely to infringe the taxpayer’s right and privacy or privacy.

B. We examine the judgment of the court below in light of the above legal principles. According to the facts acknowledged by the court below, the tax investigation of this case was conducted by Nonparty 2, a tax official, at the request of Nonparty 3, who was in dispute with Nonparty 1 and the land, as a means to pressure Nonparty 1 to return the ownership of the disputed land under the name of the tax investigation, and there was a lack of objective necessity for the tax investigation. In addition, although the investigation of this case was concluded by the Seoul District Tax Office, the Seoul District Tax Office, which was in charge of the tax investigation of this case, concluded that the suspicion of evading gift tax due to the acquisition of real estate at low price cannot be acknowledged, the scope of the investigation was expanded by the comprehensive corporate tax investigation of the company of this case without reasonable grounds, which was in violation of the minimum principle. Lastly, although the tax investigation of this case takes the form of the tax investigation, it constitutes a typical case that abused the authority of the tax official for personal interest, and its illegality is very serious. Ultimately, the tax investigation of this case is unlawful.

The court below's decision that the disposition of this case should be revoked illegally is just in accordance with such legal principles. Contrary to the allegations in the grounds of appeal, the court below did not err by misapprehending the legal principles on the selection of persons subject to tax investigation

3. 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 Poe-dae (Presiding Justice)