Tax Escape

7/28/2019 Tax Escape

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G.R. No. L-18384 September 20, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,vs.HEIRS OF CESAR JALANDONI, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.Jaime R. Nuevas for defendants-appellants heirs of Cesar Jalandoni.Filemon Flores and Aniano Bagabaldo for defendants-appellants Angeles Jalandoni, et al.

BAUTISTA ANGELO, J .:

Isabel Ledesma died intestate on June 23, 1948 leaving real properties situated in the provinces ofNegros Occidental and Rizal and in the cities of Manila and Baguio, and personal properties consisting ofshares of stock in various domestic corporations. She left as heirs her husband Bernardino Jalandoni and threechildren, namely, Cesar, Angeles and Delfin, all surnamed Jalandoni.

On November 19, 1948, Cesar Jalandoni, one of the heirs, filed an estate and inheritance tax returnreporting the following: (1) that the real and personal properties owned by the deceased and her survivinghusband had a total market value of P1,324,555.80; (2) that after deducting therefrom the conjugal share of herhusband and some expenses the net estate subject to estate tax was P28,148.04; and (3) that the amountsubject to inheritance tax was P542,225.83. This return also shows that no testamentary or intestateproceedings were instituted.

On the basis of this return the Bureau of Internal Revenue made an assessment on November 20, 1948calling for the payment of the amounts of P31,435.95 and P58,863.52 as estate and inheritance taxes,respectively, stating therein that the assessment was "to be considered partial pending investigation of thereturn." These sums were paid by Cesar Jalandoni.

After a preliminary investigation was made of the properties reported in the abovementioned return, asecond assessment was made on January 27, 1953 by the Bureau of Internal Revenue showing that there wasdue from the estate the amounts of P5,539.67 and P9,899.37 as deficiency estate and inheritance taxes,respectively, for which reason a demand was made on Bernardino Jalandoni stating therein that the same wasstill "to be considered partial pending further investigation of the return," which amounts were paid byBernardino Jalandoni on February 28, 1953.

True to the foregoing reservation, the Bureau of Internal Revenue conducted another investigation andthis time it found (1) that the market value of the lands reported in the return filed by Cesar Jalandoni wasunderdeclared in the amount of P365,149.50; (2) that seven lots which were registered in the Talisay-Silaycadastre of Negros Occidental as belonging to the deceased, including their improvements, were omitted fromthe return the same having a market value of P100,200.00; and (3) the shares of stock owned by the deceasedin the Victorias Milling Company, Hawaiian-Philippine Company and Central Azucarera de la Carlota, thoughincluded in the return, were however underdeclared in the amount of P16,355.36, and on the basis of thesefindings a third assessment was made against the estate on May 9, 1956 wherein the heirs were required to

pay the amounts of P29,995.30 and P49,842.05 as deficiency estate and inheritance taxes, respectively,including accrued interests, with the warning that failure on their part to pay the same would subject them to thepayment of surcharge, interest, and penalty for late payment of the tax.

In answer to this third assessment after notice was served on the administrator of the estate, BernardinoJalandoni, Lorenzo J. Teves, in his capacity as counsel of the heirs of the deceased, wrote a letter to theCollector of Internal Revenue setting up the defense of prescription in the sense that the deficiency in theestate and inheritance taxes payment of which was required therein can no longer be collected since more thanfive years had already elapsed from the filing of the return invoking in his favor Section 331 of the NationalInternal Revenue Code. To this defense, the Collector retorted claiming that the stand of counsel cannot be


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entertained for the reason that, it appearing that the estate and inheritance tax return which was filed by theadministrator or by the heirs contained omissions which amount to fraud indicative of an intention to evadepayment of the proper tax due the government, the taxes then being collected could still be demanded withinten years from the discovery of the falsity or omission pursuant to Section 332(a) of said Code, which periodhad not yet expired, and as a consequence, the assessment notice was reiterated with the request that thedeficiency estate and inheritance taxes therein demanded be settled as soon as possible. And noting that the30-day period within which the heirs could appeal the Collector's assessment to the Court of Tax Appeals had

already elapsed, while on the other hand they indicated their unwillingness to settle the claim, the Collector ofInternal Revenue filed the present case before the Court of First Instance of Manila pressing the collection ofthe deficiency estate and inheritance taxes assessed against the heirs of the deceased Isabel LedesmaJalandoni.

While this case was pending hearing on the merits, the lower court set a date for pre-trial in an effort tohave the parties agree on a stipulation of facts, and this having failed, upon request of defendants, the lowercourt ordered the Collector of Internal Revenue to verify the allegation that the seven lots in Negros Occidentalwhich were claimed not to have been included in the return filed by Cesar Jalandoni were in fact includedtherein, and to this effect the Collector designated Examiner Genaro Butas to conduct the examination. In hisreport Examiner Butas stated that of the seven lots that were previously reported not included in the return, twowere actually declared therein, though he reaffirmed his previous finding as regards the other five lots and themarket value of the sugar lands and rice lands left by the deceased and the value of the shares of stock ownedby her in several domestic corporations.

There being no additional evidence, oral or documentary, submitted by the parties, and passing solely onthe allegations appearing in the pleadings which appear to be undisputed, the trial court rendered its decisionon February 16, 1960 ordering defendants, jointly and severally, to pay plaintiff the sum of P79,837.35 asestate and inheritance taxes, plus the interest that had accrued thereon as a result of their delinquency.Defendants interposed the present appeal.

It is claimed that the lower court erred in f inding that the return submitted by Cesar Jalandoni in behalf ofthe heirs concerning the estate of the deceased for the purpose of the payment of the required estate andinheritance taxes is false and fraudulent there being no evidence on record showing that said return was filed inbad faith for which reason fraud cannot be imputed to appellants. As against this claim appellee advances thetheory that since fraudulent intent is a state of mind which cannot be proven by direct evidence, the same maybe inferred from facts and circumstances that appear to be undisputed as was done by the court a quo as

follows:

The difference between the amounts appearing in the returns filed and the undeclaredproperties of the estate of the deceased is a substantial understatement of the true value of the estatein question. The court is of the opinion, and so holds that the tax returns filed were false. A substantialunderstatement of stocks and the omission of seven (7) parcels of land belonging to the estate of thedeceased, makes it impossible for the court to believe that the omission or understatements were dueto inadvertence, negligence, or honest statement of error. Circumstances such as this are competentto base a finding of willful intent.1awphl.nt

And to bolster up this finding appellee submits the following facts which, it contends, appear in therecord: (1) among the real properties belonging to the deceased five lots in Negros Occidental, includingimprovements thereon, with a market value of P58,570.00 were not included in the return filed by a

representative of appellants; (2) the value of the sugar and rice lands that were reported in the return wereunderdeclared in the amount of P365,149.50; and (3) the market value of the shares of stock owned by thedeceased in the Victorias Milling Company, Hawaiian-Philippine Company and the Central Azucarera de laCarlota was underdeclared in the amount of P16,355.36. In other words, it is claimed that a total amount ofP440,074.86 which constitutes real asset of the estate has been deliberately omitted from the return therebyevincing an intention to evade the payment of the correct amount of tax due to the government.

We are of the opinion that this finding is neither fair nor reasonable. To begin with, it should be herenoted that when this case was pending hearing on the merits before the lower court, the latter, upon request ofappellants, ordered the Collector of Internal Revenue to verify the allegation that there were seven lots in


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Negros Occidental which were claimed not to have been included in the return filed by Cesar Jalandoni, and tothis effect the Collector designated Examiner Genaro Butas to conduct the examination. Examiner Butas, afterconducting the examination, submitted his report the pertinent of which reads:

Lot No.Classification Assessed Value Fair Market Value

493 Sugarland P15,140.00 P21,630.00

710 390.00 550.00521 21,000.00 30,000.00

954 820.00 1,230.00

939 1,210.00 1,720.00

229Lot 6,080.00 6,080.00

House 12,000.00 12,000.00

228

Commercial 6,400.00 6,400.00

Concrete House 10,000.00 10,000.00

Camarin 500.00 500.00

TOTALP73,650.00 P90,110.00

In other words, from the report of Examiner Butas the following may be gleaned: that of the seven lotsalleged to have been excluded from the return, three were actually included, with the particularity that theywere the most valuable, to wit: Lot 493 with a market value of P21,630.00; Lot 521 with a market value ofP30,000.00; and Lot 229 with a market value of P12,000.00, while another lot was not also included because itbelonged to Delfin Jalandoni, or Lot 228 which, including improvements, has a market value of P16,900.00.Hence, from the foregoing we find that the aggregate value of the aforesaid four lots is P86,610.00 which, ifdeducted from the total value of the seven lots amounting to P90,110.00, gives a balance of P3,500.00 as thevalue of the three remaining lots. These three lots being conjugal property, one-half thereof belonging to thedeceased's spouse should still be deducted, thus leaving a small balance of P1,750.00. If to this we add that,as the record shows, these three lots were already declared in the return submitted by Bernardino Jalandoni aspart of his property and his wife for purposes of income tax, there is reason to believe that their omission fromthe return submitted by Cesar Jalandoni was merely due to an honest mistake or inadvertence as properlyexplained by appellants. We can hardly dispute this conclusion as it would be stretching too much the

imagination if we would find that, because of such inadvertence, which appears to be inconsequential, the heirsof the deceased deliberately omitted from the return the three lots with the only purpose of defrauding thegovernment after declaring therein as asset of the estate property worth P1,324,555.80.

The same thing may be said with regard to the alleged undervaluation of certain sugar and rice landsreported by Cesar Jalandoni which appellee fixes at P365,149.50, for the same can at most be considered asthe result of an honest difference of opinion and not necessarily an intention to commit fraud. It should bestated that in the estate and inheritance tax returns submitted by Cesar Jalandoni on November 19, 1948 hereported said lands as belonging to the deceased with a statement of what in his opinion represent theirreasonable actual value but which happened not to tally with the valuation made by the Collector of InternalRevenue. Certainly if there is any mistake in the valuation made by Jalandoni the same can only be consideredas honest mistake, or one based on excusable inadvertence, he being not an expert in appraising real estate.The deficiency assessment, moreover, was made by the Collector of Internal Revenue more than five yearsfrom the filing of the return, and experience shows that such an intervening period is sufficiently long to, warrantan increase in value of real estate which is precisely what was found by the Collector of Internal Revenue withregard to the lands in question. It is certainly an error to impute fraud based on an honest difference of opinion.

Finally, we find unreasonable to impute with regard to the appraisal made by appellants of the shares ofstock of the deceased in Victorias Milling Company, Hawaiian-Philippine Company and Central Azucarera de laCarlota, simply because Cesar Jalandoni placed in his return an aggregate market value of P95,480.00,instead of mentioning the book value declared by said corporations in the returns filed by them with the Bureauof Internal Revenue. The fact that the value given in the returns did not tally with the book value appearing inthe corporate books is not in itself indicative of fraud especially when we take into consideration the


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circumstance that said book value only became known several months after the death of the deceased.Moreover, it is a known fact that stock securities frequently fluctuate in value and a mere difference of opinionin relation thereto cannot serve as proper basis for assessing an intention to defraud the government.

Having reached the conclusion that the heirs of the deceased have not committed any act indicative ofan intention to evade the payment of the inheritance or estate taxes due the government, as evidenced by theirwillingness in the past to pay all the taxes properly assessed against them, it is evident that the instant claim ofappellee has already prescribed under Section 331 of the National Internal Revenue Code. And with thisconclusion, a discussion of the other errors assigned by appellants would seem to be unnecessary.

WHEREFORE, the decision appealed from is reversed and the complaint of appellee is dismissed. Nopronouncement as to costs.

Bengzon, C.J., Concepcion, Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.Reyes, J.B.L. and Regala, JJ., took no part.

G.R. No. L-13203 January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner,

vs.COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sycip, Quisumbing, Salazar & Associates for petitioner.Office of the Solicitor General for respondents.

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondentCollector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 tothe fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total ofP2,215,809.27, plus costs of the suit.

From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo SonsHardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of thePhilippines, with principal office at 404 Dasmarias St., Manila. Incorporated in 1916, it was engaged, prior tothe last world war, in the importation and sale of hardware supplies and equipment. After the liberation, itresumed its business and until June of 1946 bought a number of cars and trucks from General MotorsOverseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do businessin the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code onthe basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid nofurther sales tax on its sales to the public.

On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in thebusiness of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 dividedinto 10,000 shares with a par value of P100 each.

At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equalproportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first threenamed subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two arerespectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.

After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the carsand tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public inthe Visayas and Mindanao.


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When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM carsand trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previousarrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its salesto Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since suchsales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to thepublic.

On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, theCollector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85as deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to the fourth quarter of1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM tothe public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were oneand the same corporation, the former being the subsidiary of the latter.

The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by theagents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952countermanded his demand for sales tax deficiency on the ground that "after several investigations conductedinto the matter no sufficient evidence could be gathered to sustain the assessment of this Office based on thetheory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The withdrawal was subject,however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance to

whom the papers relative to the case were endorsed, apparently not agreeing with the withdrawal of theassessment, returned them to the respondent Collector for reinvestigation.

After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954,redetermined that the aforementioned tax assessment was lawfully due the government and in additionassessed deficiency sales tax due from petitioner for the four quarters of 1950; the respondents' last demandwas in the total sum of P2,215,809.27 detailed as follows:

DeficiencySales Tax

75%Surcharge

Total AmountDue

Assessment (First) of November 7, 1950 fordeficiency sales Tax for the period from 3rdQrtr 1947 to 4th Qrtr 1949 inclusive P1,031,296.60 P773,473.45 P1,804,769.05

Additional Assessment for period from 1st to4th Qrtr 1950, inclusive 234,880.13 176,160.09 411,040.22

Total amount demanded per letter ofDecember 16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging thatthere is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct ofpetitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax alreadypaid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on eachvehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against Yutivo andsustaining the respondent Collector's theory that there was no legitimate orbona fide purpose in theorganization of SM the apparent objective of its organization being to evade the payment of taxes andthat it was owned (or the majority of the stocks thereof are owned) and controlled by Yutivo and is a mere

subsidiary, branch, adjunct, conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals withJudge Roman Umali not taking part disregarded its separate corporate existence and on April 27, 1957,rendered the decision now complained of. Of the two Judges who signed the decision, one voted for themodification of the computation of the sales tax as determined by the respondent Collector in his decision so asto give allowance for the reduction of the tax already paid (resulting in the reduction of the assessment toP820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive part of the decision,however, affirmed the assessment made by the Collector. Reconsideration of this decision having been denied,Yutivo brought the case to this Court thru the present petition for review.


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Tax Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to the amount ofthe sales tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as itdid many years past in the promotion and pursuit of the business purposes for which it was organized.

In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once onlyon every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer." The use ofthe word "original" and the express provision that the tax was collectible "once only" evidently has made theprovisions susceptible of different interpretations. In this connection, it should be stated that a taxpayer has thelegal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by meanswhich the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs.Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the taxpayer to reduce taxes areall right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he honestly believes to besufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to beinsufficient. Thus in the case ofCourt Holding Co. vs. Commr. 2 T. Cl. 531, it was held that though an incorrectposition in law had been taken by the corporation there was no suppression of the facts, and a fraud penaltywas not justified.

The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud.As a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to theexistence of fraud. He even doubted the validity of his f irst assessment dated November 7, 1959. It must be

remembered that the fraud which respondent Collector imputed to Yutivo must be related to its f iling of salestax returns of less taxes than were legally due. The allegation of fraud, however, cannot be sustained withoutthe showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for therein called fortherein were less than what were legally due. Considering that respondent Collector himself with the aid of hislegal staff, and after some two years of investigation and duty of investigation and study concluded in 1952 thatYutivo's sales tax returns were correct only to reverse himself after another two years it would seemharsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns wereinaccurate.

On this point, one other consideration would show that the intent to save taxes could not have existed in theminds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the vendee,and is usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not SMhandled the retail, the additional tax that would have been payable by it, could have been easily passed off tothe consumer, especially since the period covered by the assessment was a "seller's market" due to the post-

war scarcity up to late 1948, and the imposition of controls in the late 1949.

It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling price byYutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to aninadvertent accounting omission, and could hardly be considered as proof of willful channelling and fraudulentevasion of sales tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377,affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremely smallinducement for Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these smallarrastre charges in the sales tax returns of Yutivo is clearly shown in the records of Yutivo, which isuncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)

We are, however, inclined to agree with the court below that SM was actually owned and controlled bypetitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles

at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed that thepetitioner, which is engaged principally in hardware supplies and equipment, is completely controlled by theYutivo, Young or Yu family. The founders of the corporation are closely related to each other either by blood oraffinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admittedthat SM was organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of itsincorporation 2,500 shares worth P250,000.00 appear to have been subscribed in five equal proportions by YuKhe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named subscribersare brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip arerespectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo. According to the Articlesof Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but


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actually the said sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM andsubsequent transfers thereof were paid by Yutivo itself. The payments were made, however, without anytransfer of funds from Yutivo to SM. Yutivo simply charged the accounts of the subscribers for the amountallegedly advanced by Yutivo in payment of the shares. Whether a charge was to be made against theaccounts of the subscribers or said subscribers were to subscribe shares appears to constitute a unilateral acton the part of Yutivo, there being no showing that the former initiated the subscription.

The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook thesubscription of shares, employing the persons named or "charged" with corresponding account as nominalstockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware ofthese subscriptions, but considering that they were the principal officers and constituted the majority of theBoard of Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo'sMoreover, these persons were related to death other as brothers or first cousins. There was every reason forthem to agree in order to protect their common interest in Yutivo and SM.

The issued capital stock of SM was increased by additional subscriptions made by various person's but exceptNg Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging the accountsof said stockholders and crediting the corresponding amounts in favor of SM, without actually transferring cashfrom Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere unilateral act of Yutivoa accounts of the virtue of its control over the individual persons charged, would necessarily exercise

preferential rights and control directly or indirectly, over the shares, it being the party which really undertook topay or underwrite payment thereof.

The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so evenconceding that the original subscribers were stockholders bona fide Yutivo was at all times in control of themajority of the stock of SM and that the latter was a mere subsidiary of the former.

True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were madeto their immediate relatives, either to their respective spouses and children or sometimes brothers or sisters.Yutivo's shares in SM were transferred to immediate relatives of persons who constituted its controllingstockholders, directors and officers. Despite these purported changes in stock ownership in both corporations,the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, YuKhe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority inboth boards. All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that there

was a common ownership and interest in the two corporations.

SM is under the management and control of Yutivo by virtue of a management contract entered into betweenthe two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the controlling majorityof the Board of Directors of SM. At the same time the principal officers of both corporations are identical. Inaddition both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law ofYutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the business,financial and management policies of both corporations could be directed towards common ends.

Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash assetsof SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any andall receipts of cash by SM including its branches were transmitted or transferred immediately and directly toYutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM

are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and payments inrelation there, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the absencethereof which occurs generally, a corresponding charge is made against the account of SM in Yutivo's books.The payments for and charges against SM are made by Yutivo as a matter of course and without need of anyfurther request, the latter would advance all such cash requirements for the benefit of SM. Any and allpayments and cash vouchers are made on Yutivo stationery and made under authority of Yutivo's corporateofficers, without any copy thereof being furnished to SM. All detailed records such as cash disbursements, suchas expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summaryrecord thereof on the basis of information received from Yutivo.


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All the above plainly show that cash or funds of SM, including those of its branches which are directly remittedto Yutivo, are placed in the custody and control of Yutivo, resources and subject to withdrawal only by Yutivo.SM's being under Yutivo's control, the former's operations and existence became dependent upon the latter.

Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SMmerely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that itmaintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recordedand effected by mere debit or credit entries against the reciprocal account maintained in their respective booksof accounts and indicate the dependency of SM as branch upon Yutivo.

Apart from the accounting system, other facts corroborate or independently show that SM is a branch ordepartment of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo Manila astheir "Head Office" or "Home Office" as shown by their letters of remittances or other correspondences. Thesecorrespondences were actually received by Yutivo and the reference to Yutivo as the head or home office isobvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo. Added to thisfact, is that SM may freely use forms or stationery of Yutivo

The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastreconveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and truckson piers and wharves, were charged against SM. Overtime charges for the unloading of cars and trucks as

requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged against andtreated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo'sexpenses in importing goods and not SM's. But since those charges were made against SM, it plainly appearsthat Yutivo had sole authority to allocate its expenses even as against SM in the sense that the latter is a mereadjunct, branch or department of the former.

Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo weretaken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the twoorganizations are separate juridical entities, the corresponding receipts or receivables should have beentreated as income on the part of Yutivo. But such management fees were recorded as "Reserve for Bonus" andwere therefore a liability reserve and not an income account. This reserve for bonus were subsequentlydistributed directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showingthat the management fees were paid directly to Yutivo officers and employees.

Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the creditto the latter not only in the form of starting capital but also in the form of credits extended for the cars andvehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when thecapital had been exhausted. Thus, the increases in the capital stock were made in advances or "Guarantee"payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. Atall times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds,policies, expenditures and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctlydisregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.

Petitioner contends that the respondent Collector had lost his right or authority to issue the disputedassessment by reason of prescription. The contention, in our opinion, cannot be sustained. It will be noted that

the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. Thecorresponding returns filed by petitioner covering the said period was made at the earliest on October 1, asregards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within thefive-year period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it isadmitted, was withdrawn by the Collector on insufficiency of evidence, but November 15, 1952 due toinsufficiency of evidence, but the withdrawal was made subject to the approval of the Secretary of Finance andthe Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No. 401-A, series of 1951.The decision of the previous assessment of November 7, Collector countermanding the as 1950 was forwardedto the Board of Tax Appeals through the Secretary of Finance but that official, apparently disagreeing with thedecision, sent it back for re-investigation. Consequently, the assessment of November 7, 1950 cannot be


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considered to have been finally withdrawn. That the assessment was subsequently reiterated in the decision ofrespondent Collector on December 16, 1954 did not alter the fact that it was made seasonably. In thisconnection, it would appear that a warrant of distraint and levy had been issued on March 28, 1951 in relationwith this case and by virtue thereof the properties of Yutivo were placed under constructive distraint. Saidwarrant and constructive distraint have not been lifted up to the present, which shows that the assessment ofNovember 7, 1950 has always been valid and subsisting.

Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December 16,1954, the same was assessed well within the prescribed five-year period.

Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period onassessment. The argument is untenable, for, as already seen, the assessment was never finally withdrawn,since it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The authority of theSecretary to act upon the assessment cannot be questioned, for he is expressly granted such authority undersection 9 of Executive Order No. 401-And under section 79 (c) of the Revised Administrative Code, he has"direct control, direction and supervision over all bureaus and offices under his jurisdiction and may, anyprovision of existing law to the contrary not withstanding, repeal or modify the decision of the chief of saidBureaus or offices when advisable in public interest."

It should here also be stated that the assessment in question was consistently protested by petitioner, making

several requests for reinvestigation thereof. Under the circumstances, petitioner may be considered to havewaived the defense of prescription.

"Estoppel has been employed to prevent the application of the statute of limitations against thegovernment in certain instances in which the taxpayer has taken some affirmative action to prevent thecollection of the tax within the statutory period. It is generally held that a taxpayer is estopped torepudiate waivers of the statute of limitations upon which the government relied. The cases frequentlyinvolve dissolved corporations. If no waiver has been given, the cases usually show come conductdirected to a postponement of collection, such, for example, as some variety of request to apply anoverassessment. The taxpayer has 'benefited' and 'is not in a position to contest' his tax liability. Adefinite representation of implied authority may be involved, and in many cases the taxpayer hasreceived the 'benefit' of being saved from the inconvenience, if not hardship of immediate collection. "

Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues,but generally speaking, the cases present a strong combination of equities against the taxpayer, andfew will seriously quarrel with their application of the doctrine of estoppel." (Mertens Law of FederalIncome Taxation, Vol. 10-A, pp. 159-160.)

It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 es involving an originalassessment of more than P5,000 refers only to compromises and refunds of taxes, but not to totalwithdrawal of the assessment. The contention is without merit. A careful examination of the provisions of bothsections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein isintended as a check or control upon the powers of the Collector of Internal Revenue in respect to assessmentand refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on partial remissionof taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals, then with more reasonshould the power of the Collector to withdraw totally an assessment be subject to such review.

We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of the5% fraud surcharge. As already shown in the early part of this decision, no element of fraud is present.

Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to thedeficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM arein substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulentreturn.


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The case ofCourt Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is inpoint. The petitioner Court Holding Co. was a corporation consisting of only two stockholders, to wit: MinnieMiller and her husband Louis Miller. The only assets of third husband and wife corporation consisted of anapartment building which had been acquired for a very low price at a judicial sale. Louis Miller, the husband,who directed the company's business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine,husband and wife, for the sum of $54,000.00, payable in various installments. He received $1,000.00 as downpayment. The sale of this property for the price mentioned would have netted the corporation a handsome profit

on which a large corporate income tax would have to be paid. On the afternoon of February 23, 1940, when theMillers and the Fines got together for the execution of the document of sale, the Millers announced that theirattorney had called their attention to the large corporate tax which would have to be paid if the sale was madeby the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a resolution todeclare a dividend to themselves "payable in the assets of the corporation, in complete liquidation andsurrender of all the outstanding corporate stock." The building, which as above stated was the only property ofthe corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactlythe same price and under the same terms as had been previously agreed upon between the corporation andthe Fines.

The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported notaxable gain as having been received from the sale of its assets. The Millers, of course, reported a long termcapital gain on the exchange of their corporate stock with the corporate property. The Commissioner of InternalRevenue contended that the liquidating dividend to stockholders had no purpose other than that of taxavoidance and that, therefore, the sale by the Millers to the Fines of the corporation's property was insubstance a sale by the corporation itself, for which the corporation is subject to the taxable profit thereon. Inrequiring the corporation to pay the taxable profit on account of the sale, the Commissioner of InternalRevenue, imposed a surcharge of 25% for delinquency, plus an additional surcharge as fraud penalties.

The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the taxand was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should beliable for the assessed taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner ofInternal Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the fraudpenalties, holding that an attempt to avoid a tax does not necessarily establish fraud; that it is a settled principlethat a taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the CourtHolding Co., was of the opinion that the method by which it attempted to effect the sale in question was legallysufficient to avoid the imposition of a tax upon it, its adoption of that methods not subject to censure; and that in

taking a position with respect to a question of law, the substance of which was disclosed by the statementindorsed on it return, it may not be said that that position was taken fraudulently. We quote in full the pertinentportion of the decision of the Court of Tax Appeals: .

". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable profiton the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a replydenying fraud and averring that the loss reported on its return was correct to the best of its knowledgeand belief. We think the respondent has not sustained the burden of proving a fraudulent intent. Wehave concluded that the sale of the petitioner's property was in substance a sale by the petitioner, andthat the liquidating dividend to stockholders had no purpose other than that of tax avoidance. But theattempt to avoid tax does not necessarily establish fraud. It is a settled principle that a taxpayer maydiminish his liability by any means which the law permits. United States v. Isham, 17 Wall.496; Gregory v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner herewas of the opinion that the method by which it attempted to effect the sale in question was legally

sufficient to avoid the imposition of tax upon it, its adoption of that method is not subject to censure.Petitioner took a position with respect to a question of law, the substance of which was disclosed bythe statement endorsed on its return. We can not say, under the record before us, that that positionwas taken fraudulently. The determination of the fraud penalties is reversed."

When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only onceand on the original sales by the former and neither the latter nor SM paid taxes on their subsequent sales.Yutivo might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was enoughas in the case of GM Consequently, in filing its return on the basis of its sales to SM and not on those by the


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latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of defraudingthe government of its revenues which will justify the imposition of the surcharge penalty.

We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency salestax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales taxprovisions (sees. 184.186, Tax Code) impose a tax on original sales measured by "gross selling price" or"gross value in money". These terms, as interpreted by the respondent Collector, do not include the amount ofthe sales tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal Revenue datedJuly 29, 1939, which implements sections 184.186 of the Tax Code provides: "

. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged, transferredas the term is used in the aforecited sections (sections 184, 185 and 186) of the National InternalRevenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendorto receive or get the goods. However, if a manufacturer, producer, or importer, in fixing the grossselling price of an article sold by him has included an amount intended to cover the sales tax in thegross selling price of the articles, the sales tax shall be based on the gross selling price less theamount intended to cover the tax, if the same is billed to the purchaser as a separate item.

General Circular No. 440 of the same Bureau reads:

Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax. On sales made after he third quarter of 1939, the amount intended to cover the sales tax must bebilled to the purchaser as separate items in the, invoices in order that the reduction thereof from thegross ailing price may be allowed in the computation of the merchants' percentage tax on the sales.Unless billed to the purchaser as a separate item in the invoice, the amounts intended to cover thesales tax shall be considered as part of the gross selling price of the articles sold, and deductionsthereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)

Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did notform part of the "gross selling price" as the measure of the tax. Since Yutivo had previously billed the sales taxseparately in its sales invoices to SM General Circulars Nos. 431 and 440 should be deemed to have beencomplied. Respondent Collector's method of computation, as opined by Judge Nable in the decisioncomplained of

. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption ofthe procedure would in certain cases elevate the bracket under which the tax is based. The latepayment is already penalized, thru the imposition of surcharges, by adopting the theory of theCollector, we will be creating an additional penalty not contemplated by law."

If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 thetotal deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud, wouldamount only to P820,549.91 as shown in the following computation:

Rates ofSales Tax

Gross Sales ofVehicles Exclusiveof Sales Tax

Sales Taxes Dueand Computedunder Gen. Cir Nos.

431 & 400

Total Gross SellingPrice Charged tothe Public

5 % P11,912,219.57 P595,610.98 P12,507,83055

7% 909,559.50 63,669.16 973,228.66

10% 2,618,695.28 261,869.53 2,880,564.81

15% 3,602,397.65 540,359.65 4,142,757.30

20% 267,150.50 53,430.10 320,580.60

30% 837,146.97 251,114.09 1,088,291.06


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50% 74,244.30 37,122.16 111,366.46

75% 8,000.00 6,000.00 14,000.00

TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

Less Taxes Paid by Yutivo 988,655.76

Deficiency Tax still due P820,549.91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo wouldpay, exclusive of the surcharges.

Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction inpromulgating judgment for the affirmance of the decision of respondent Collector by less than the statutoryrequirement of at least two votes of its judges. Anent this contention, section 2 of Republic Act No. 1125,creating the Court of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals shall constitute aquorum, and the concurrence of two judges shall be necessary to promulgate decision thereof. . . . " It is onrecord that the present case was heard by two judges of the lower court. And while Judge Nable expressed hisopinion on the issue of whether or not the amount of the sales tax should be excluded from the gross sellingprice in computing the deficiency sales tax due from the petitioner, the opinion, apparently, is merely an

expression of his general or "private sentiment" on the particular issue, for he concurred the dispositive part ofthe decision. At any rate, assuming that there is no valid decision for lack of concurrence of two judges, thecase was submitted for decision of the court below on March 28, 1957 and under section 13 of Republic Act1125, cases brought before said court hall be decided within 30 days after submission thereof. "If no decision isrendered by the Court within thirty days from the date a case is submitted for decision, the party adverselyaffected by said ruling, order or decision, may file with said Court a notice of his intention to appeal to theSupreme Court, and if no decision has as yet been rendered by the Court, the aggrieved party may file directlywith the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisionsof this section." The case having been brought before us on appeal, the question raised by petitioner asbecome purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified inthat petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon forlate payment.

So ordered without costs.

Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur.Padilla, J., took no part.

G.R. No. L-17618 August 31, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.NORTON and HARRISON COMPANY, respondent.

Office of the Solicitor General for petitioner.Pio Joven for respondent.

PAREDES, J .:

This is an appeal interposed by the Commissioner of Internal Revenue against the following judgment of theCourt of Tax Appeals:

IN VIEW OF THE FOREGOING, we find no legal basis to support the assessment in question againstpetitioner. If at all, the assessment should have been directed against JACKBILT, the manufacturer.


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Accordingly, the decision appealed from is reversed, and the surety bond filed to guarantee paymentof said assessment is ordered cancelled. No pronouncement as to costs.

Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at wholesale and retail, all kinds ofgoods, wares, and merchandise; (2) to act as agents of manufacturers in the United States and foreigncountries; and (3) to carry on and conduct a general wholesale and retail mercantile establishment in thePhilippines. Jackbilt is, likewise, a corporation organized on February 16, 1948 primarily for the purpose ofmaking, producing and manufacturing concrete blocks. Under date of July 27, 1948. Norton and Jackbiltentered into an agreement whereby Norton was made the sole and exclusive distributor of concrete blocksmanufactured by Jackbilt. Pursuant to this agreement, whenever an order for concrete blocks was received bythe Norton & Harrison Co. from a customer, the order was transmitted to Jackbilt which delivered themerchandise direct to the customer. Payment for the goods is, however, made to Norton, which in turn paysJackbilt the amount charged the customer less a certain amount, as its compensation or profit. To exemplifythe sales procedures adopted by the Norton and Jackbilt, the following may be cited. In the case of the sale of420 pieces of concrete blocks to the American Builders on April 1, 1952, the purchaser paid to Norton the sumof P189.00 the purchase price. Out of this amount Norton paid Jackbilt P168.00, the difference obviously beingits compensation. As per records of Jackbilt, the transaction was considered a sale to Norton. It was under thisprocedure that the sale of concrete blocks manufactured by Jackbilt was conducted until May 1, 1953, whenthe agency agreement was terminated and a management agreement between the parties was entered into.The management agreement provided that Norton would sell concrete blocks for Jackbilt, for a fixed monthlyfee of P2,000.00, which was later increased to P5,000.00.

During the existence of the distribution or agency agreement, or on June 10, 1949, Norton & Harrison acquiredby purchase all the outstanding shares of stock of Jackbilt. Apparently, due to this transaction, theCommissioner of Internal Revenue, after conducting an investigation, assessed the respondent Norton &Harrison for deficiency sales tax and surcharges in the amount of P32,662.90, making as basis thereof thesales of Norton to the Public. In other words, the Commissioner considered the sale of Norton to the public asthe original sale and not the transaction from Jackbilt. The period covered by the assessment was from July 1,1949 to May 31, 1953. As Norton and Harrison did not conform with the assessment, the matter was brought tothe Court of Tax Appeals.

The Commissioner of Internal Revenue contends that since Jackbilt was owned and controlled by Norton &Harrison, the corporate personality of the former (Jackbilt) should be disregarded for sales tax purposes, andthe sale of Jackbilt blocks by petitionerto the public must be considered as the original sales from which the

sales tax should be computed. The Norton & Harrison Company contended otherwise that is, the transactionsubject to tax is the sale from Jackbilt to Norton.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by thisHonorable Court, without prejudice to the parties adducing other evidence to prove their case not covered bythis stipulation of facts. 1wph1.t

The majority of the Tax Court, in relieving Norton & Harrison of liability under the assessment, made thefollowing observations:

The law applicable to the case is Section 186 of the National Internal Revenue Code which imposes apercentage tax of 7% on every original sale of goods, wares or merchandise, such tax to be based onthe gross selling price of such goods, wares or merchandise. The term "original sale" has been defined

as the first sale by every manufacturer, producer or importer. (Sec. 5, Com. Act No. 503.) Subsequentsales by persons other than the manufacturer, producer or importer are not subject to the sales tax.

If JACKBILT actually sold concrete blocks manufactured by it to petitioner under the distributorship oragency agreement of July 27, 1948, such sales constituted the original sales which are taxable underSection 186 of the Revenue Code, while the sales made to the public by petitioner are subsequentsales which are not taxable. But it appears to us that there was no such sale by JACKBILT topetitioner. Petitioner merely acted as agent for JACKBILT in the marketing of its products. This isshown by the fact that petitioner merely accepted orders from the public for the purchase of JACKBILTblocks. The purchase orders were transmitted to JACKBILT which delivered the blocks to the


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purchaser directly. There was no instance in which the blocks ordered by the purchasers weredelivered to the petitioner. Petitioner never purchased concrete blocks from JACKBILT so that it neveracquired ownership of such concrete blocks. This being so, petitioner could not have sold JACKBILTblocks for its own account. It did so merely as agent of JACKBILT. The distributorship agreement ofJuly 27, 1948, is denominated by the parties themselves as an "agency for marketing" JACKBILTproducts. ... .

x x x x x x x x x

Therefore, the taxable selling price of JACKBILT blocks under the aforesaid agreement is the pricecharged to the public and not the amount billed by JACKBILT to petitioner. The deficiency sales taxshould have been assessed against JACKBILT and not against petitioner which merely acted as theformer's agent.

x x x x x x x x x

Presiding Judge Nable of the same Court expressed a partial dissent, stating:

Upon the aforestated circumstances, which disclose Norton's control over and direction of Jackbilt's

affairs, the corporate personality of Jackbilt should be disregarded, and the transactions betweenthese two corporations relative to the concrete blocks should be ignored in determining the percentagetax for which Norton is liable. Consequently, the percentage tax should be computed on the basis ofthe sales of Jackbilt blocks to the public.

The majority opinion is now before Us on appeal by the Commissioner of Internal Revenue, on four (4)assigned errors, all of which pose the following propositions: (1) whether the acquisition of all the stocks of theJackbilt by the Norton & Harrison Co., merged the two corporations into a single corporation; (2) whether thebasis of the computation of the deficiency sales tax should be the sale of the blocks to the public and not toNorton.

It has been settled that the ownership of all the stocks of a corporation by another corporation does notnecessarily breed an identity of corporate interest between the two companies and be considered as asufficient ground for disregarding the distinct personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June

30, 1961). However, in the case at bar, we find sufficient grounds to support the theory that the separateidentities of the two companies should be disregarded. Among these circumstances, which we find notsuccessfully refuted by appellee Norton are: (a) Norton and Harrison owned all the outstanding stocks ofJackbilt; of the 15,000 authorized shares of Jackbilt on March 31, 1958, 14,993 shares belonged to Norton andHarrison and one each to seven others; (b) Norton constituted Jackbilt's board of directors in such a way as toenable it to actually direct and manage the other's affairs by making the same officers of the board for bothcompanies. For instance, James E. Norton is the President, Treasurer, Director and Stockholder of Norton. Healso occupies the same positions in Jackbilt corporation, the only change being, in the Jackbilt, he is merely anominal stockholder. The same is true with Mr. Jordan, F. M. Domingo, Mr. Mantaring, Gilbert Golden andGerardo Garcia, while they are merely employees of the North they are Directors and nominal stockholders ofthe Jackbilt (c) Norton financed the operations of the Jackbilt, and this is shown by the fact that the loansobtained from the RFC and Bank of America were used in the expansion program of Jackbilt, to pay advancesfor the purchase of equipment, materials rations and salaries of employees of Jackbilt and other sundryexpenses. There was no limit to the advances given to Jackbilt so much so that as of May 31, 1956, the unpaid

advances amounted to P757,652.45, which were not paid in cash by Jackbilt, but was offset by shares of stockissued to Norton, the absolute and sole owner of Jackbilt; (d) Norton treats Jackbilt employees as its own.Evidence shows that Norton paid the salaries of Jackbilt employees and gave the same privileges as Nortonemployees, an indication that Jackbilt employees were also Norton's employees. Furthermore service renderedin any one of the two companies were taken into account for purposes of promotion; (e) Compensation given toboard members of Jackbilt, indicate that Jackbilt is merely a department of Norton. The income tax return ofNorton for 1954 shows that as President and Treasurer of Norton and Jackbilt, he received from NortonP56,929.95, but received from Jackbilt the measly amount of P150.00, a circumstance which points out thatremuneration of purported officials of Jackbilt are deemed included in the salaries they received from Norton.The same is true in the case of Eduardo Garcia, an employee of Norton but a member of the Board of Jackbilt.


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His Income tax return for 1956 reveals that he received from Norton in salaries and bonuses P4,220.00, butreceived from Jackbilt, by way of entertainment, representation, travelling and transportation allowancesP3,000.00. However, in the withholding statement (Exh. 28-A), it was shown that the total of P4,200.00 andP3,000.00 (P7,220.00) was received by Garcia from Norton, thus portraying the oneness of the two companies.The Income Tax Returns of Albert Golden and Dioscoro Ramos both employees of Norton but board membersof Jackbilt, also disclose the game method of payment of compensation and allowances. The offices of Nortonand Jackbilt are located in the same compound. Payments were effected by Norton of accounts for Jackbilt and

vice versa. Payments were also made to Norton of accounts due or payable to Jackbilt and vice versa.

Norton and Harrison, while not denying the presence of the set up stated above, tried to explain that the controlover the affairs of Jackbilt was not made in order to evade payment of taxes; that the loans obtained by it whichwere given to Jackbilt, were necessary for the expansion of its business in the manufacture of concrete blocks,which would ultimately benefit both corporations; that the transactions and practices just mentioned, are notunusual and extraordinary, but pursued in the regular course of business and trade; that there could be noconfusion in the present set up of the two corporations, because they have separate Boards, their cash assetsare entirely and strictly separate; cashiers and official receipts and bank accounts are distinct and different;they have separate income tax returns, separate balance sheets and profit and loss statements. Theseexplanations notwithstanding an over-all appraisal of the circumstances presented by the facts of the case,yields to the conclusion that the Jackbilt is merely an adjunct, business conduit or alter ego, of Norton andHarrison and that the fiction of corporate entities, separate and distinct from each, should be disregarded. Thisis a case where the doctrine of piercing the veil of corporate fiction, should be made to apply. In the caseofLiddell & Co. Inc. v. Coll. of Int. Rev., supra, it was held:

There are quite a series of conspicuous circumstances that militates against the separate and distinctpersonality of Liddell Motors Inc., from Liddell & Co. We notice that the bulk of the business of Liddell& Co. was channel Red through Liddell Motors, Inc. On the other hand, Liddell Motors Inc. pursued noactivities except to secure cars, trucks, and spare parts from Liddell & Co., Inc. and then sel l them tothe general public. These sales of vehicles by Liddell & Co, to Liddell Motors. Inc. for the most partwere shown to have taken place on the same day that Liddell Motors, Inc. sold such vehicles to thepublic. We may even say that the cars and trucks merely touched the hands of Liddell Motors, Inc. asa matter of formality.

x x x x x x x x x

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned andcontrolled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of theseparate corporate identity of one from the other. There is however, in this instant case, a peculiarsequence of the organization and activities of Liddell Motors, Inc.

As opined in the case ofGregory v. Helvering"the legal right of a tax payer to decrease the amount ofwhat otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannotbe doubted". But as held in another case, "where a corporation is a dummy, is unreal or a sham andserves no business purpose and is intended only as a blind, the corporate form may be ignored for thelaw cannot countenance a form that is bald and a mischievous fictions".

... a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenueofficers in proper cases, may disregard the separate corporate entity where it serves but as a shield for

tax evasion and treat the person who actually may take benefits of the transactions as the personaccordingly taxable.

... to allow a taxpayer to deny tax liability on the ground that the sales were made through another anddistinct corporation when it is proved that the latter is virtually owned by the former or that they arepractically one and the same is to sanction a circumvention of our tax laws. (and cases cited therein.)

In the case ofYutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan. 28, 1961, this Court made asimilar ruling where the circumstances of unity of corporate identities have been shown and which are identicalto those obtaining in the case under consideration. Therein, this Court said:


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We are, however, inclined to agree with the court below that SM was actually owned and controlled bypetitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling thevehicles at retail (here concrete blocks) ... .

It may not be amiss to state in this connection, the advantages to Norton in maintaining a semblance ofseparate entities. If the income of Norton should be considered separate from the income of Jackbilt, then eachwould declare such earning separately for income tax purposes and thus pay lesser income tax. The combinedtaxable Norton-Jackbilt income would subject Norton to a higher tax. Based upon the 1954-1955 income taxreturn of Norton and Jackbilt (Exhs. 7 & 8), and assuming that both of them are operating on the same fiscalbasis and their returns are accurate, we would have the following result: Jackbilt declared a taxable net incomeof P161,202.31 in which the income tax due was computed at P37,137.00 (Exh. 8); whereas Norton declaredas taxable, a net income of P120,101.59, on which the income tax due was computed at P25,628.00. The totalof these liabilities is P50,764.84. On the other hand, if the net taxable earnings of both corporations arecombined, during the same taxable year, the tax due on their total which is P281,303.90 would be P70,764.00.So that, even on the question of income tax alone, it would be to the advantages of Norton that thecorporations should be regarded as separate entities.

WHEREFORE, the decision appealed from should be as it is hereby reversed and another entered making theappellee Norton & Harrison liable for the deficiency sales taxes assessed against it by the appellantCommissioner of Internal Revenue, plus 25% surcharge thereon. Costs against appellee Norton & Harrison.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes J.B.L., Regala and Makalintal, JJ., concur.

G.R. No. L-19707 August 17, 1967

PHILIPPINE ACETYLENE CO., INC., petitioner,vs.COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.Office of the Solicitor General for respondents.

CASTRO, J.:

The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During theperiod from June 2, 1953 to June 30, 1958, it made various sales of its products to the National PowerCorporation, an agency of the Philippine Government, and to the Voice of America an agency of the UnitedStates Government. The sales to the NPC amounted to P145,866.70, while those to the VOA amounted toP1,683, on account of which the respondent Commission of Internal Revenue assessed against, anddemanded from, the petitioner the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant tothe following-provisions of the National Internal Revenue Code:

Sec. 186. Percentage tax on sales of other articles.There shall be levied, assessed and collectedonce only on every original sale, barter, exchange, and similar transaction either for nominal orvaluable considerations, intended to transfer ownership of, or title to, the articles not enumerated insections one hundred and eighty-four and one hundred and eighty-five a tax equivalent to seven per

centum of the gross selling price or gross value in money of the articles so sold, bartered exchanged,or transferred, such tax to be paid by the manufacturer or producer: . . . .

Sec. 183. Payment of percentage taxes.(a) In general.It shall be the duty of every personconducting business on which a percentage tax is imposed under this Title, to make a true andcomplete return of the amount of his, her, or its gross monthly sales, receipts or earnings, or grossvalue of output actually removed from the factory or mill warehouse and within twenty days after theend of each month, pay the tax due thereon: Provided, That any person retiring from a businesssubject to the percentage tax shall notify the nearest internal revenue officer thereof, file his return ordeclaration and pay the tax due thereon within twenty days after closing his business.


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If the percentage tax on any business is not paid within the time specified above, the amount of the taxshall be increased by twenty-five per centum, the increment to be a part of the tax.

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA areexempt from taxation. It asked for a reconsideration of the assessment and, failing to secure one, appealed tothe Court of Tax Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on themanufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company, themanufacturer or producer of oxygen and acetylene gases sold to the National Power Corporation, cannot claimexemption from the payment of sales tax simply because its buyer the National Power Corporation isexempt from the payment of all taxes." With respect to the sales made to the VOA, the court held that goodspurchased by the American Government or its agencies from manufacturers or producers are exempt from thepayment of the sales tax under the agreement between the Government of the Philippines and that of theUnited States, provided the purchases are supported by certificates of exemption, and since purchasesamounting to only P558, out of a total of P1,683, were not covered by certificates of exemption, only the salesin the sum of P558 were subject to the payment of tax. Accordingly, the assessment was revised and thepetitioner's liability was reduced from P12,910.60, as assessed by the respondent commission, to P12,812.16.1

The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the sales it

made to the NPC and the VOA because both entities are exempt from taxation.

I

The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:

Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be exemptfrom all taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions ofthe Republic of the Philippines, its provinces, cities and municipalities.

It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax on salesmade to it because while the tax is paid by the manufacturer or producer, the tax is ultimately shifted by thelatter to the former. The petitioner invokes in support of its position a 1954 opinion of the Secretary of Justice

which ruled that the NPC is exempt from the payment of all taxes "whether direct or indirect."

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the Code. Is ita tax on the producer or on the purchaser? Statutes of the type under consideration, which impose a tax onsales, have been described as "act[s] with schizophrenic symptoms,"3 as they apparently have two faces one that of a vendor tax, the other, a vendee tax. Fortunately for us the provisions of the Code throw some lighton the problem. The Code states that the sales tax "shall be paid by the manufacturer or producer,"4 who must"make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings orgross value of output actually removed from the factory or mill warehouse and within twenty days after the endof each month, pay the tax due thereon."5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser is anentity like the NPC which is exempt from the payment of "all taxes, except real property tax," the tax cannot be

collected from sales.

Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase "passthe tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v. United States,6 he said: "Thephrase 'passed the tax on' is inaccurate, as obviously the tax is laid and remains on the manufacturer and onhim alone. The purchaser does not really pay the tax. He pays or may pay the seller more for the goodsbecause of the seller's obligation, but that is all. . . . The price is the sum total paid for the goods. The amountadded because of the tax is paid to get the goods and for nothing else. Therefore it is part of the price . . .".


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It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that reasonalone that one may validly argue that it is a tax on the purchaser. The exemption granted to the NPC may belikened to the immunity of the Federal Government from state taxation and vice versa in the federal system ofgovernment of the United States. In the early case ofPanhandle Oil Co. v. Mississippi7 the doctrine ofintergovernment mental tax immunity was held as prohibiting the imposition of a tax on sales of gasoline madeto the Federal Government. Said the Supreme court of the United States:

A charge at the prescribed. rate is made on account of every gallon acquired by the United States. It isimmaterial that the seller and not the purchaser is required to report and make payment to the state.Sale and purchase constitute a transaction by which the tax is measured and on which the burdenrests. . . . The necessary operation of these enactments when so construed is directly to retard,impede and burden the exertion by the United States, of its constitutional powers to operate the fleetand hospital. . . . To use the number of gallons sold the United States as a measure of the privilege taxis in substance and legal effect to tax the sale. . . . And that is to tax the United States to exacttribute on its transactions and apply the same to the support of the state. 1wph1.t

Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:

If the plaintiff in error had paid the tax and added it to the price the government would have nothing tosay. It could take the gasoline or leave it but it could not require the seller to abate his charge even if it

had been arbitrarily increased in the hope of getting more from the government than could be got fromthe public at large. . . . It does not appear that the government would have refused to pay a price thatincluded the tax if demanded, but if the government had refused it would not have exonerated theseller. . . .

. . . I am not aware that the President, the Members of the Congress, the Judiciary or to come nearerto the case at hand, the Coast Guard or the officials of the Veterans' Hospital [to which the sales weremade], because they are instrumentalities of government and cannot function naked and unfed,hitherto have been held entitled to have their bills for food and clothing cut down so far as theirbutchers and tailors have been taxed on their sales; and I had not supposed that the butchers andtailors could omit from their tax returns all receipts from the large class of customers to which I havereferred. The question of interference with Government, I repeat, is one of reasonableness and degreeand it seems to me that the interference in this case is too remote.

But time was not long in coming to confirm the soundness of Holmes' position. Soon it became obvious that totest the constitutionality of a statute by determining the party on which the legal incidence of the tax fell was anunsatisfactory way of doing things. The fall of the bastion was signalled by Chief Justice Hughes' statementinJames v. Dravo Constructing Co.8 that "These cases [referring to Panhandle and Indian Motorcycle Co. v.United States, 283 U.S. 570 (1931)] have been distinguished and must be deemed to be limited to theirparticular facts."

In 1941,Alabama v. King & Boozer9 held that the constitutional immunity of the United States from statetaxation was not infringed by the imposition of a state sales tax with which the seller was chargeable but whichhe was required to collect from the buyer, in respect of materials purchased by a contractor with the UnitedStates on a cost-plus basis for use in carrying out its contract, despite the fact that the economic burden of thetax was borne by the United States.

The asserted right of the one to be free of taxation by the other does not spell immunity from payingthe added costs, attributable to the taxation of those who furnish supplies to the Government and whohave been granted no tax immunity. So far as a different view has prevailed, see Panhandle Oil Co. v.Mississippi and Graves v. Texas Co., supra, we think it no longer tenable.

Further inroads into the doctrine ofPanhandle were made in 1943 when the U.S. Supreme Court held thatimmunity from state regulation in the performance of governmental functions by Federal officers and agenciesdid not extend to those who merely contracted to furnish supplies or render services to the government eventhough as a result of an increase in the price of such supplies or services attributable to the state regulation, itsultimate effect may be to impose an additional economic burden on the Government.10


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But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so made in 1952inEsso Standard Oil v. Evans11 which held that a contractor is not exempt from the payment of a state privilegetax on the business of storing gasoline simply because the Federal Government with which it has a contract forthe storage of gasoline is immune from state taxation.

This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of thegovernment property. Instead, the amount collected is graduated in accordance with the exercise ofEsso's privilege to engage in such operations; so it is not "on" the federal property. . . . Federalownership of the fuel will not immunize such a private contractor from the tax on storage. It maygenerally, as it did here, burden the United States financially. But since James vs. Dravo ContractingCo., 302 U.S. 134, 151, 82 L. ed. 155, 167, 58 S. Ct. 208, 114 ALR 318, this has been no fatal flaw. . .. 12

We have determined the current status of the doctrine of intergovernmental tax immunity in the United States,by showing the drift of the decisions following announcement of the original rule, to point up the that fact thateven in those cases where exemption from tax was sought on the ground of state immunity, the attempt hasnot met with success.

As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine:

Since the Dravo case settled that it does not matter that the economic burden of the gross receipts taxmay be shifted to the Government, it could hardly matter that the shift comes about by explicitagreement covering taxes rather than by being absorbed in a higher contract price by bidders for acontract. The situation differed from that in the Panhandle and similar cases in that they involved buttwo parties whereas here the transaction was tripartite. These cases are condemned in so far as theyrested on the economic ground of the ultimate incidence of the burden being on the Government, butthis condemnation still leaves open the question whether either the state or the United States whenacting in governmental matters may be made legally liable to the other for a tax imposed on it asvendee.

The carefully chosen language of the Chief Justice keeps these cases from foreclosing the issue. . . .Yet at the time it would have been a rash man who would find in this a dictum that a sales tax clearlyon the Government as purchaser is invalid or a dictum that Congress may immunize its contractors.13

If a claim of exemption from sales tax based on state immunity cannot command assent, much less can a claimresting on statutory grant.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the taxbecomes a part of the price which the purchaser must pay. It does not matter that an additional amount is billedas tax to the purchaser. The method of listing the price and the tax separately and defining taxable grossreceipts as the amount received less the amount of the tax added, merely avoids payment by the seller of a taxon the amount of the tax. The effect is still the same, namely, that the purchaser does not pay the tax. He paysor may pay the seller more for the goods because of the seller's obligation, but that is all and the amount addedbecause of the tax is paid to get the goods and for nothing else.14

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax islargely a matter of economics.15 Then it can no longer be contended that a sales tax is a tax on the purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on themanufacturer or producer and not a tax on the purchaser except probably in a very remote and inconsequentialsense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is permissible.

II


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This conclusion should dispose of the same issue with respect to sales made to the VOA, except that a claim ishere made that the exemption of such sales from taxation rests on stronger grounds. Even the Court of Tax

Appeals appears to share this view as is evident from the following portion of its decision:

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and therespondent are in agreement that the Voice of America is an agency of the United States Governmentand as such, all goods purchased locally by it directly from manufacturers or producers are exemptfrom the payment of the sales tax under the provisions of the agreement between the Government ofthe Philippines and the Government of the United States, (See Commonwealth Act No. 733) providedsuch purchases are supported by serially numbered Certificates of Tax Exemption issued by thevendee-agency, as required by General Circular No. V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or importersshall be exempt from the sales tax.

It was issued purportedly to implement the Agreement between the Republic of the Philippines and the UnitedStates of America Concerning Military Bases,16 but we find nothing in the language of the Agreement to warrantthe general exemption granted by that circular.

The pertinent provisions of the Agreement read:

ARTICLE V. Exemption from Customs and Other Duties

No import, excise, consumption or other tax, duty or impost shall be charged on material, equipment,supplies or goods, including food stores and clothing, for exclusive use in the construction,maintenance, operation or defense of the bases, consigned to, or destined for, the United Statesauthorities and certified by them to be for such purposes.

ARTICLE XVIII.Sales and Services Within the Bases

1. It is mutually agreed that the United States Shall have the right to establish on bases, free of alllicenses; fees; sales, excise or other taxes, or imposts; Government agencies, including concessions,such as sales commissaries and post exchanges, messes and social clubs, for the exclusive use ofthe United States military forces and authorized civilian personnel and their families. The merchandiseor services sold or d

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Tax Escape