'1 Trillion Won Multi-Level Marketing Scam' Headquarters Chief Loses 100 Million Won Tax Appeal Lawsuit

The head of a multi-level marketing (MLM) company involved in a "trillion-won scale MLM fraud" case filed a lawsuit disputing the imposition of taxes amounting to hundreds of millions of won but lost in the first trial.

According to the legal community on the 10th, the Seoul Administrative Court Administrative Division 5 (Presiding Judge Kim Sun-yeol) recently ruled against former MLM company head Mr. A in the first trial of the administrative lawsuit he filed against the Seongbuk Tax Office chief, requesting the cancellation of the comprehensive income tax imposition.

Seoul Administrative Court, Seocho-gu, Seoul. / Photo by Hyunmin Kim kimhyun81@

Previously, Kim Seong-hoon, former CEO of IDS Holdings (53), was convicted by the Supreme Court in 2017 to 15 years in prison for deceiving about 12,000 people from 2011 to 2016 by promising monthly dividends of 1-10% and principal returns if they invested in FX margin trading and other schemes, embezzling approximately 1.7 trillion won. FX margin trading is a speculative product involving simultaneous over-the-counter buying and selling of multiple foreign currencies to gain exchange rate profits. This case was called the "second Jo Hee-pal case" because it was similar to the Jo Hee-pal case, where about 70,000 investors were defrauded of 5 trillion won.

Mr. A worked as the head of the company under former CEO Kim. Mr. A invested his own money directly into the company and attracted other investors. He was sentenced to 1 year and 6 months in prison with a 3-year probation for conspiring with former CEO Kim in the MLM business. Investigations revealed that Mr. A received 5% interest monthly on loans and 2% monthly dividends on investment funds from the company.

The tax authorities investigated the taxation data on dividends, interest, and recruitment commissions Mr. A received from 2014 to 2016 and confirmed that comprehensive income tax filings for interest and recruitment commissions were omitted. On September 10, 2020, the tax authorities imposed a total of about 189.5 million won in omitted taxes on Mr. A.

Mr. A filed a lawsuit claiming the tax imposition was unfair. He argued, "The taxation was improperly conducted based on tax data created by an illegal MLM company," and "Since the money lost from investments was greater than the money received from the company, it cannot be considered business income."

The first trial dismissed Mr. A’s claim. The court first judged that the tax data was reliable. It stated, "The data was business-use records organized to manage investment funds, profits, and fees for the business, and mechanically recording the investment and profit payment status of participants in the books was an essential element for maintaining the (fraudulent) business."

The court pointed out, "Since Mr. A received investment recruitment funds each time he attracted investments, this is already realized income," and "Even if the reinvestment losses exceed the commissions received, reinvestment is merely a method of disposing of commissions included in total revenue. Therefore, it is unrelated to the calculation of business income."

Mr. A appealed the first trial ruling.

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