Case Summary (G.R. No. L-13203)
Corporate Entity Doctrine and Fraud Allegations
The Supreme Court reiterated the principle that corporations are distinct legal entities. They may be “pierced” only to prevent fraud or to avoid wrongful consequences. CTA concluded SM was owned, controlled, and financed by Yutivo, hence an alter ego created to evade sales tax.
Absence of Tax-Evasion Intent
The Court found no clear and convincing evidence that SM’s creation in 1946 aimed to evade tax:
- No sales tax applied to Yutivo–SM transactions until Yutivo became importer in mid-1947.
- SM’s incorporation preceded any possible tax liability, undermining a tax-avoidance motive.
- CTA’s reliance on pre-incorporation rumors about GM’s withdrawal was speculative and unsupported by the record.
Continuity of Bona Fide Operations
Even after Republic Act No. 594 (1951) removed any tax-saving advantage by fixing sales tax on landed cost regardless of resale price, SM continued legitimate operations as a vehicle retailer. This post-1951 conduct contradicted the notion that SM was purely a tax-avoidance conduit.
Taxpayer’s Right to Minimize Liability
Under established Philippine and U.S. authorities, a taxpayer may employ lawful means to reduce tax. An honest legal position—even if ultimately incorrect—does not constitute fraud. The Collector’s own vacillation (initial assessment, withdrawal, and re-assessment) negated clear proof of willful misstatement.
Control, Ownership, and Alter Ego Findings
The Supreme Court agreed that SM was controlled by Yutivo through:
– Common shareholders (family members) whose share subscriptions were actually funded or charged by Yutivo.
– Identical boards of directors and principal officers, linked by family ties.
– A management contract and centralized accounting in Yutivo’s books.
– Direct handling of SM’s cash receipts and disbursements by Yutivo without independent banking.
These circumstances justified disregarding SM’s separate personality to determine Yutivo’s true tax liability.
Prescription and Authority to Assess
– The initial assessment (Nov. 7, 1950) fell within the five-year period from Yutivo’s sales returns (as early as Oct. 1, 1947) under Tax Code § 331.
– Its withdrawal (Nov. 15, 1952) was not final: review by the Secretary of Finance was pending under EO 401-A.
– A constructive distraint issued Mar. 28, 1951 remained in force.
– The 1950–1954 assessments were timely and not barred by prescription, and Yutivo’s objections estopped it from raising the defense.
Fraud Surcharge Reversed
Because no fraud was proven, the 50% surcharge under Tax Code § 133 was unwarranted. The Court analogized to Court Holding Co. vs. Commissioner, where a tax-avoidance scheme without suppression of material facts did not justify fraud penalties.
Proper Computation of Deficiency Tax
The CTA erred in imposing tax on SM’s gross selling price without deducting the separately billed sales tax. Bureau of Intern
Case Syllabus (G.R. No. L-13203)
Facts
- Yutivo Sons Hardware Company (“Yutivo”) is a domestic corporation organized in 1916 with principal office at 404 Dasmarinas St., Manila, originally engaged in the importation and sale of hardware supplies.
- After World War II, Yutivo resumed business and, until June 1946, purchased cars and trucks from General Motors Overseas Corporation (“GM”), which, as importer, paid sales tax under Tax Code §§ 184–186 on its selling price to Yutivo.
- On June 13, 1946, Southern Motors, Inc. (“SM”) was incorporated with authorized capital of ₱1,000,000; 2,500 shares (₱250,000) were subscribed equally by five persons, three of whom were sons of Yutivo’s founders and two of whom were children of co-founders.
- From incorporation of SM until GM’s withdrawal in mid-1947, Yutivo sold GM-imported vehicles to SM, which retailed them in Visayas and Mindanao without paying further sales tax.
- Upon GM’s exit in 1947, Yutivo was appointed importer for Visayas and Mindanao and continued the exclusive wholesale arrangement with SM, paying sales tax to government on sales to SM.
Tax Assessment and Administrative Proceedings
- November 7, 1950: Collector of Internal Revenue assessed Yutivo ₱1,804,769.05 deficiency sales tax plus 75% surcharge (₱773,472.45) for Q3 1947–Q4 1949, totaling ₱1,804,769.05.
- Yutivo protested; after reinvestigation, Collector withdrew assessment on November 15, 1952 for lack of evidence, subject to review by Secretary of Finance and Board of Tax Appeals.
- Secretary of Finance returned the case for further inquiry.
- December 18, 1954: Collector redetermined liability, added deficiency for Q1–Q4 1950, and levied total demand of ₱2,215,809.27 (₱1,266,176.73 deficiency + ₱949,632.54 surcharge).
Issues Presented
- Whether SM’s separate corporate personality should be disregarded, treating its retail sales as Yutivo’s taxable base.
- Whether sales tax already paid by Yutivo on its wholesale transactions must be deducted from SM’s gross selling price.
- Whether the 75% surcharge for “fraud” was properly imposed.
- Whether the assessments prescribed or were barred by time.
- Whether the Court of Tax Appeals rendered a valid decision given its quorum and concurrence.
Court of Tax Appeals Decision
- Held that SM was Yutivo’s subsidiary, branch, conduit or alter ego organized solely to evade payment of taxes, warranting disregard of separate existence.
- Adopted Collector’s theory that Yutivo’s taxable sales were SM’s retail transactions.
- Two judges signed: one would have modified computation to allow deduction of tax already paid (reducing deficiency to ₱820,509.91 excl. surcharges); the other affirmed Collector’s full assessment.
- Dispositive portion affirmed the assessment of ₱2,215,809.27.
- Motion for reconsideration denied.