Court: Taxation on Illegal Income Without Payment of Forfeiture Is Justified

The court ruled that tax assessments on unpaid additional fines for illegal income are justified.

According to the legal community on the 12th, the Seoul Administrative Court, Administrative Division 8 (Presiding Judge Lee Jeong-hee) ruled against Mr. A in a lawsuit seeking cancellation of a comprehensive income tax imposition filed against the tax authorities. Mr. A had been sentenced to imprisonment and additional fines for charges including bribery.

Mr. A was prosecuted on charges of receiving 110 million won as a bribe for arranging loans and was sentenced in 2019 to 1 year and 6 months in prison and an additional fine of 110 million won. The Supreme Court upheld the guilty verdict.

The tax authorities regarded the money Mr. A received as "money received through bribery" under the Income Tax Act, classified as "other income," and in 2022 imposed and notified Mr. A of a comprehensive income tax of about 36 million won.

Mr. A filed an administrative lawsuit arguing that although he did obtain illegal income, he ultimately did not retain it, and thus taxing it was unfair.

However, the court stated, "There is no confirmation that Mr. A has fully paid the additional fines or that the state agency has completed enforcement of the fines," and ruled that the tax authorities' assessment was not unlawful.

The court explained, "If taxation can only occur after the illegal income is no longer at risk of being lost, it would effectively favor those who obtained income illegally over those who obtained income lawfully," and added, "It is sufficient to adjust the tax if the illegal income is later recovered through proper procedures."

The ruling implies that while taxpayers can be exempted from tax obligations through correction requests if the additional fines are actually collected, there is no problem with the tax assessment itself.