CORPORATE ENTITY THEORY
FACTS:
1. CRUZ VS. DALISAY
ISSUE:
Whether or not Sheriff Quiterio Dalisay may be
subjected under disciplinary action?
RULING:
YES; Quiterio may be subjected under
disciplinary action. Having executed the NLRC
judgment against ADELIO CRUZ instead of
Qualitrans Limousine Services Inc., he did not
fulfill what he is duty-bound to do as Sheriff that
amounts to malfeasance on his part as a public
officer, whose duty is connected with the
administration of justice and execution of
judgments.
The tenor of the NLRC judgment and the
implementing writ is clear enough. It directed
Qualitrans Limousine Service, Inc. to reinstate
the discharged employees and pay them full
backwages. Respondent, however, chose to
"pierce the veil of corporate entity" usurping a
power belonging to the court and assumed
improvidently that since the complainant is the
owner/president of Qualitrans Limousine
Service, Inc., they are one and the same. It is a
well-settled doctrine both in law and in equity
that as a legal entity, a corporation has a
personality distinct and separate from its
individual stockholders or members. The mere
fact that one is president of a corporation does
not render the property he owns or possesses
the property of the corporation, since the
president, as individual, and the corporation are
separate entities.
2. PALAY INC. VS. CLAVE
Palay Inc., through its PRESIDENT, Albert
Onstott, executed a Contract to Sell with private
respondent Nazario Dumpit. In said contract,
there was a certain provision for "extrajudicial
recission" whereby the contract shall be
automatically rescinded upon respondent's
default in paying the installements of the
purchase price of a certain parcel of land owned
by the corporation and sold by it to the the
respondent. After paying certain sums, Dumpit
defaulted and stopped paying the installments.
Almost six years after, Dumpit asked Palay Inc.
for the assignment of his rights in favor of a
certain Lourdez Dizon. However, Palay Inc.
refused to comply since, according to it, the
contract to sell has already been rescinded upon
his failure to pay the other installments. Dumpit
then filed a letter complaint against Palay Inc.
before the National Housing authority, which
declared that the contract provision of
extrajudicial rescission is void and ordered that
Palay Inc. and Onstott must jointly and severally
to return Dumpit the amount of installments the
latter paid previously. Palay Inc. appealed the
matter before the Office of the PResident, which
likewise ruled in favor of Dumpit and affirmed
the NHA award. Aggrieved, Palay Inc. and
Onstott elevated the case to the Supreme Court.
For his part, Onstott avers that he must not be
made liable to pay jointly and severally with
Palay Inc.; thus, the doctrine of piercing the
corporate veil is not applicable.
ISSUE:
Whether or not Onstott may be made to jointly
and severally liable, to return / pay Dumpit's
installment, with Palay Inc.?
RULING:
No. Onstott should not be made liable jointly
and severally with Palay Inc., because the
corporation's personality is distinct and
separate from him. Petitioner Onstott was
made liable because he was then the President
of the corporation and he was the controlling
stockholder. No sufficient proof exists on record
that said petitioner used the corporation to
defraud private respondent. He cannot, therefore,
be made personally liable just because he
"appears to be the controlling stockholder". Mere
ownership by a single stockholder or by another
corporation is not of itself sufficient ground for
disregarding the separate corporate personality.
In this respect then, a modification of the
Resolution under review is called for.
As a general rule, a corporation may not be
made to answer for acts or liabilities of its
stockholders or those of the legal entities to
which it may be connected and vice versa.
However, the veil of corporate fiction may be
pierced when it is used as a shield to further an
end subversive of justice; or for purposes that
could not have been intended by the law that
created it; or to defeat public convenience,
justify wrong, protect fraud, or defend crime. ; or
to perpetuate fraud or confuse legitimate issues;
or to circumvent the law or perpetuate
deception; or as an alter ego, adjunct or
business conduit for the sole benefit of the
stockholders.
3. SORIANO VS. CA
FACTS:
Soriano, Esperanza, and Macadangdang
(hereinafter as Soriano et.al) comprise the
majority of the board of directors of Bacarra
FaComa Inc., which is a farmer cooperative. A
transaction was made between Bacarra and
private respondent Gervacio Cu over 160 bales
(of fifty kilos each) bales of tobacco. A receipt
was executed in favor of Cu, which states that
the corporation received said bales and that Cu
shall be paid according to the tobacco grading by
the redrying plant. Conflict arose when Cu was
not paid for the tobacco he delivered, which
prompted him to file a case for the collection of
sum of money against Soriano et. al. The trial
court ruled in favor of Cu and ordered that
Soriano et.al, jointly and severally, pay the
former the amount of the tobacco bales. The trial
court's decision, when Soriano et.al appealed
against it, was merely affirmed by the CA. It
rationated that Soriano et. al were not
authorized to enter into the transaction and that
their act of signing their positions in the receipt
is not a showing that they were indeed
authorized by the corporation to act for it.
Aggrieved, Soriano et.al elevated the case to the
Supreme Court.
ISSUE:
May Soriano, Esperanza, and Macadangdang, as
board of directors of directors of Bacarra
FaComa Inc., be held liable for the the payment
of tobacco bales sold to the corporation by
Gervacio Cu?
RULING:
No; Soriano et. al may not be held liable for such
payment, notwithstanding the fact that they
comprise the majority of the board of directors
who signed under the receipt, since they have a
distinct and separate personality from the
corporation they represent. In the absence of
any showing that they are using said
corporation in furtherance to and as a conduit to
any fraudulent, subversive, and illegal motives,
piercing the corporate vein cannot be applied int
their case.
In the light of the foregoing, it is clear that the
liability of the petitioners under the document
subject of the instant case, is not personal but
corporate, and therefore attached to the Bacarra
(I.N.) FaCoMa, Inc. which, being a corporation,
has a personality distinct and separate from that
of the petitioners who are only its officers. It is
the general rule that the protective mantle of a
corporation's separate and distinct personality
could only be pierced and liability attached
directly to its officers and/or
members-stockholders, when the same is used
for fraudulent, unfair or illegal purpose. 13 In
the case at bar, there is no showing that the
Association entered into the transaction with the
private respondent for the purpose of defrauding
the latter of his goods or the payment thereof.
More importantly, there is no proof whatsoever
that the majority of the directors used the
distinct and separate personality of Bacarra
(I.N.) FaCoMa, Inc. as a protective shield for any
wrongdoing. Therefore, the general rule on
corporate liability, not the exception, should be
applied in resolving this case. Consequently, the
private respondent's cause of action lies against
the Bacarra (I.N.) FaCoMa, Inc., and not against
the petitioners.
PIERCING THE VEIL OF CORPORATE
 FICTION
1. PALACIO VS. FELY TRANSPORTATION CO.
FACTS:
Alfredo Carillo is the driver employed by Isabelo
Calingasan, who happens to be one of the
incorporators of Fely Transportation Co. One
day, when Carillo was driving, he ran over a
certain Mario Palacio, a minor. A criminal case
has been filed against him by the minor's father,
Gregorio Palacio, in which he (Carillo) was
convicted of the crime charged and was ordered
to pay the sum of Php 500. Pursuant to the
Revised Penal Code, as Carillo's employer,
Calingasan is subsidiarily liable for the payment
of such civil liablity. After said conviction, the
jeep driven by Carillo was conveyed and
transferred to Fely Transportation, which was
incorporated by Isabelo, his wife, and his
children. Then, a civil case was filed against the
Company, this time by Gregorio Palacio -
together with Mario - as plaintiffs, seeking the
payment of the civil liability pronounced in the
judgment of the previously adjudicated criminal
case. Fely Transportation, by way of defense,
averred that the plaintiffs have no cause of
actiona against it because it is a separate entity
from Isabelo Calingasan; and if at all, said cause
of action has already barred by the judgment in
the aforesaid criminal case.
ISSUE:
May Fely Transportation be compelled to pay the
damages sought for my Gregorio Palacio, on
behalf of his injured minor child, Mauricio,
instead of Isabelo Calingasan?
RULING:
Yes; Fely Transportation may be compelled to
pay such damages even though the involved
party in the criminal case is Isabelo Calingasan.
This is because, there is a clear showing that
Isabelo Calingasan and Fely Transportation are
one and the same and that the latter was
incoporated merely to evade the former's civil
liability.
The Court agrees with this contention of the
plaintiffs. Isabelo Calingasan and defendant Fely
Transportation may be regarded as one and the
same person. It is evident that Isabelo
Calingasan's main purpose in forming the
corporation was to evade his subsidiary civil
liability1 resulting from the conviction of his
driver, Alfredo Carillo. This conclusion is borne
out by the fact that the incorporators of the Fely
Transportation are Isabelo Calingasan, his wife,
his son, Dr. Calingasan, and his two daughters.
We believe that this is one case where the
defendant corporation should not be heard to
say that it has a personality separate and
distinct from its members when to allow it to do
so would be to sanction the use of the fiction of
corporate entity as a shield to further an end
subversive of justice. (La Campana Coffee
Factory, et al. v. Kaisahan ng mga Manggagawa,
etc., et al., G.R. No. L-5677, May 25, 1953)
Furthermore, the failure of the defendant
corporation to prove that it has other property
than the jeep (AC-687) strengthens the
conviction that its formation was for the purpose
above indicated.
And while it is true that Isabelo Calingasan is
not a party in this case, yet, is held in the case
of Alonso v. Villamor, 16 Phil. 315, this Court
can substitute him in place of the defendant
corporation as to the real party in interest. This
is so in order to avoid multiplicity of suits and
thereby save the parties unnecessary expenses
and delay. (Sec. 2, Rule 17, Rules of Court;
Cuyugan v. Dizon. 79 Phil. 80; Quison v. Salud,
12 Phil. 109.)
Accordingly, defendants Fely Transportation and
Isabelo Calingasan should be held subsidiarily
liable for P500.00 which Alfredo Carillo was
ordered to pay in the criminal case and which
amount he could not pay on account of
insolvency.
2. MARVEL BLDG. VS. DAVID
FACTS:
In the conduct of her business, Maria D. Castro
had been found to have made enormous gains or
profits in her business. This prompted
Saturnino David, BIR collector to arrive at a tax
assessment amounting to P3,000,000. As a
consequence, he proceeded against three parcels
of land namely on which certain buildings have
already been erected. However, Maria D. Castro
avers that such properties are owned solely by
petitioner Marvel Bldg. Corporation. Marvel
Bldg. Corporation, in which Maria D. Castro is
amongst the stockholders, seeks to enjoin
defendant David from selling at a public auction
the disputed properties. For his part, David
alleges that said properties are owned solely by
Castro. His assumptions are premised on the
facts culled from the assessment done by
various internal revenue agents on Marvel Bldg.
Corporation. They are: 1) the existence of
twenty-five certificates signed by the president of
the corporation, for no justifiable reason; 2) two
sets of certificates were issued; 3) the
undisputed fact that Maria B. Castro had
made enormous profits and, therefore, had a
motive to hide them to evade the payment of
taxes; 4) the fact that the other subscribers had
no incomes of sufficient magnitude to justify
their big subscriptions; 5) were not receipted
for and deposited by the treasurer in the
name of the corporation but were kept by
Maria B. Castro herself; 6) the stockholders
or the directors never appeared to have ever
met to discuss the business of the
corporation; 7) Maria B. Castro advanced big
sums of money to the corporation without
any previous arrangement or accounting; 8)
and the fact that the books of accounts were
kept as if they belonged to Maria B. Castro
alone
ISSUE:
Should the subject properties be sold in a public
auction for the satisfaction of Maria D. Castro's
assessed 3M worth of tax obligation?
RULING:
Yes; the properties in question may be
proceeded against by the CIR Collector for the
satisfaction of Castro's revenue obligation for
such properties, based on the strong
circumstantial evidence appreciated by the
court, are owned by her and NOT of Marvel Bldg.
Corporation.
Here, in decreeing that the other incorporators
of the alleged Corporation are mere dummies,
the Court pierced the corporate veil of Marvel
Bldg. Corporation. It racionated, thus:
[Considering the abovementioned findings of
facts,] Maria B. Castro would not have asked
them to endorse their stock certificates, or be
keeping these in her possession, if they were
really the owners. They never would have
consented that Maria B. Castro keep the funds
without receipts or accounting, nor that she
manages the business without their knowledge
or concurrence, were they owners of the stocks
in their own rights. Each and every one of the
facts all set forth above, in the same manner, is
inconsistent with the claim that the
stockholders, other than Maria B. Castro, own
their shares in their own right. On the other
hand, each and every one of them, and all of
them, can point to no other conclusion than that
Maria B. Castro was the sole and exclusive
owner of the shares and that they were only her
dummies.
In our opinion, the facts and circumstances duly
set forth above, all of which have been proved to
our satisfaction, prove conclusively and beyond
reasonable doubt (section 89, Rule 123 of the
Rules of Court and section 42 of the Provisional
law for the application of the Penal Code) that
Maria B. Castro is the sole and exclusive owner
of all the shares of stock of the Marvel Building
Corporation and that the other partners are her
dummies.
3. YUTIVO AND SONS VS. CTA
FACTS:
Yutivo is engaged in the importation and sales of
hardware supplies and equipment prior to the
last world war. When it resumed its business
thereafter, it bought a number of cars and
trucks from General Motors Overseas
Corporation (GM), which is an American
corporation. In such transactions, GM, as
importer, was the one that paid sales taxes ( a
tax being collected from original sales). And
because of the taxation rule that a tax may only
be collected once, Yutivo did not pay any tax
with regard to such transaction. Then, a
corporation called Southerm Motors, Inc. (SM)
has been organized for the purpose of selling
cars, trucks, and their spare parts to the
public/consumers. Three of SMs incorporators
were actually founders of Yutivo. Yutivo then
sells such cars, trucks, and spare parts to SM
a practice which continued until the time of the
institution of this case. Later, GM withdrew from
the Philippines and instead, assigned Yutivo as
its importer for the Mindanao and Visayas areas.
Now, as importer, Yutivo paid the sales tax upon
its sale of such products to SM. SM, in turn did
not pay any tax on the basis of its sales to the
public. After several months of investigation by
revenue officers started in July, 1948, the
Collector of Internal Revenue made an
assessment upon Yutivo and demanded from the
latter P1,804,769.85 as deficiency sales tax plus
surcharge covering the period from the third
quarter of 1947 to the fourth quarter of 1949; or
from July 1, 1947 to December 31, 1949,
claiming that the taxable sales were the retail
sales by SM to the public and not the sales at
wholesale made by, Yutivo to the latter
inasmuch as SM and Yutivo were one and 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 the agents of
the Bureau of Internal Revenue, the respondent
Collector in his letter dated November 15, 1952
countermanded his demand for sales tax
deficiency on the ground that "after several
investigations conducted into the matter no
sufficient evidence could be gathered to sustain
the assessment of this Office based on the
theory 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 the assessment, 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 addition assessed deficiency sales tax
due from petitioner for the four quarters of
1950; the respondents' last demand was in
the total sum of P2,215,809.27. This second
assessment was contested by the petitioner
Yutivo before the Court of Tax Appeals, alleging
that there is no valid ground to disregard the
corporate personality of SM and to hold that it is
an adjunct of petitioner Yutivo; (2) that
assuming the separate personality of SM may be
disregarded, the sales tax already paid by Yutivo
should first be deducted from the selling price of
SM in computing the sales tax due on each
vehicle; and (3) that the surcharge has been
erroneously imposed by respondent. Finding
against Yutivo and sustaining the respondent
Collector's theory that there was no legitimate or
bona fide purpose in the organization of SM
the apparent objective of its organization being
to evade the payment of taxes and that 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 with Judge Roman
Umali not taking part disregarded its separate
corporate existence and affirmed the amount of
tax yielded from the second reassessment.
ISSUE:
Was the basis of CTAs ruling correct?
RULING:
No; Yutivo may be required to pay the retail
taxes assessed, not on the basis of the piercing
the corporate veil theory but because of the fact
that SM is its subsidiary and adjunct.
After going over the voluminous record of the
present case, we are inclined to rule that the
Court of Tax Appeals was not justified in finding
that SM was organized for no other purpose
than to defraud the Government of its lawful
revenues. In the first place, this corporation was
organized in June, 1946 when it could not have
caused Yutivo any tax savings. From that date
up to June 30, 1947, or a period of more than
one year, GM was the importer of the cars and
trucks sold to Yutivo, which, in turn resold them
to SM. During that period, it is not disputed that
GM as importer, was the one solely liable for
sales taxes. Neither Yutivo or SM was subject to
the sales taxes on their sales of cars and trucks.
The sales tax liability of Yutivo did not arise
until July 1, 1947 when it became the importer
and simply continued its practice of selling to
SM. The decision, therefore, of the Tax Court
that SM was organized purposely as a tax
evasion device runs counter to the fact that
there was no tax to evade.
It is an elementary and fundamental principle of
corporation law that a corporation is an entity
separate and distinct from its stockholders and
from other corporation petitions to which it may
be connected. However, "when the notion of legal
entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime,"
the law will regard the corporation as an
association of persons, or in the case of two
corporations merge them into one. Another rule
is that, when the corporation is the "mere alter
ego or business conduit of a person, it may be
disregarded. At this juncture, it should be stated
that the intention to minimize taxes, when used
in the context of fraud, must be proved to exist
by clear and convincing evidence amounting to
more than mere preponderance, and cannot be
justified by a mere speculation. This is because
fraud is never lightly to be presumed. Fraud is
never imputed and the courts never sustain
findings of fraud upon circumstances which, at
the most, create only suspicion.
On the other hand, the Supreme Court is
inclined to agree with the court below that SM
was actually owned and controlled by petitioner
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 the petitioner, which is
engaged principally in hardware supplies and
equipment, is completely controlled by the
Yutivo, Young or Yu family. The founders of the
corporation are closely related to each other
either by blood or affinity, and most of its
stockholders are members of the Yu (Yutivo or
Young) family. It is, likewise, admitted that SM
was organized by the leading stockholders of
Yutivo headed by Yu Khe Thai. At the time of its
incorporation 2,500 shares worth P250,000.00
appear to have been subscribed in five equal
proportions by Yu Khe Thai, Yu Khe Siong, Yu
Khe Jin, Yu Eng Poh and Washington Sycip. The
first three named subscribers are brothers,
being the sons of Yu Tien Yee, one of Yutivo's
founders. Yu Eng Poh and Washington Sycip are
respectively sons of Yu Tiong Sing and Alberto
Sycip who are co-founders of Yutivo. According
to the Articles of Incorporation of the said
subscriptions, the amount of P62,500 was paid
by the aforenamed subscribers, but actually the
said sum was advanced by Yutivo. The
additional subscriptions to the capital stock of
SM and subsequent transfers thereof were paid
by Yutivo itself. The payments were made,
however, without any transfer of funds from
Yutivo to SM. Yutivo simply charged the
accounts of the subscribers for the amount
allegedly advanced by Yutivo in payment of the
shares. Whether a charge was to be made
against the accounts of the subscribers or said
subscribers were to subscribe shares appears to
constitute a unilateral act on 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 the subscription of shares,
employing the persons named or "charged" with
corresponding account as nominal stockholders.
Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe
Siong and Yu Eng Poh were manifestly aware of
these subscriptions, but considering that they
were the principal officers and constituted the
majority of the Board of Directors of both Yutivo
and SM, their subscriptions could readily or
easily be that of Yutivo's Moreover, these
persons were related to death other as brothers
or first cousins. There was every reason for them
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 except Ng Sam Bak and David
Sycip, "payments" thereof were effected by
merely debiting 'or charging the accounts of said
stockholders and crediting the corresponding
amounts in favor of SM, without actually
transferring cash from Yutivo. Again, in this
instance, the "payments" were Yutivo, by effected
by the mere unilateral act of Yutivo a 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 to pay or underwrite
payment thereof.
The shareholders in SM are mere nominal
stockholders holding the shares for and in
behalf of Yutivo, so even conceding that the
original subscribers were stockholders bona fide
Yutivo was at all times in control of the majority
of the stock of SM and that the latter was a mere
subsidiary of the former.
4. COMMISSONER VS. NORTON AND
HARRISON
NOTES:
1. The CIR taxed Norton for sales it incurred
from the public upon selling the bricks
made by JACKBILT since the two entities
are but one and the same;
2. CTA ruled otherwise and held that
JACKBILT and Norton are different
entities. The tax must be levied upon only
insofar as Jackbilts sales of bricks to
Norton is concerned and not by the latter
to the general public.
RULING:
It has been settled that the ownership of all the
stocks of a corporation by another corporation
does not necessarily breed an identity of
corporate interest between the two companies
and be considered as a sufficient 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
separate identities of the two companies should
be disregarded. Among these circumstances,
which we find not successfully refuted by
appellee Norton are: (a) Norton and Harrison
owned all the outstanding stocks of Jackbilt; of
the 15,000 authorized shares of Jackbilt on
March 31, 1958, 14,993 shares belonged to
Norton and Harrison and one each to seven
others; (b) Norton constituted Jackbilt's board of
directors in such a way as to enable it to
actually direct and manage the other's affairs by
making the same officers of the board for both
companies. For instance, James E. Norton is the
President, Treasurer, Director and Stockholder
of Norton. He also occupies the same positions
in Jackbilt corporation, the only change being,
in the Jackbilt, he is merely a nominal
stockholder. The same is true with Mr. Jordan,
F. M. Domingo, Mr. Mantaring, Gilbert Golden
and Gerardo Garcia, while they are merely
employees of the North they are Directors and
nominal stockholders of the Jackbilt (c) Norton
financed the operations of the Jackbilt, and this
is shown by the fact that the loans obtained
from the RFC and Bank of America were used in
the expansion program of Jackbilt, to pay
advances for the purchase of equipment,
materials rations and salaries of employees of
Jackbilt and other sundry expenses. 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 stock issued 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
Norton employees, an indication that Jackbilt
employees were also Norton's employees.
Furthermore service rendered in any one of the
two companies were taken into account for
purposes of promotion; (e) Compensation given
to board members of Jackbilt, indicate that
Jackbilt is merely a department of Norton. The
income tax return of Norton for 1954 shows that
as President and Treasurer of Norton and
Jackbilt, he received from Norton P56,929.95,
but received from Jackbilt the measly amount of
P150.00, a circumstance which points out that
remuneration 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. His
Income tax return for 1956 reveals that he
received from Norton in salaries and bonuses
P4,220.00, but received from Jackbilt, by way of
entertainment, representation, travelling and
transportation allowances P3,000.00. However,
in the withholding statement (Exh. 28-A), it was
shown that the total of P4,200.00 and P3,000.00
(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 members of Jackbilt, also
disclose the game method of payment of
compensation and allowances. The offices of
Norton and 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 control over the affairs of
Jackbilt was not made in order to evade
payment of taxes; that the loans obtained by it
which were 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
not unusual and extraordinary, but pursued in
the regular course of business and trade; that
there could be no confusion in the present set
up of the two corporations, because they have
separate Boards, their cash assets are 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. These explanations 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
and Harrison and that the fiction of corporate
entities, separate and distinct from each, should
be disregarded. This is a case where the doctrine
of piercing the veil of corporate fiction, should be
made to apply. In the case of Liddell & 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 distinct personality 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 no
activities except to secure cars, trucks, and
spare parts from Liddell & Co., Inc. and then sell
them to the general public. These sales of
vehicles by Liddell & Co, to Liddell Motors. Inc.
for the most part were shown to have taken
place on the same day that Liddell Motors, Inc.
sold such vehicles to the public. We may even
say that the cars and trucks merely touched the
hands of Liddell Motors, Inc. as a matter of
formality.
xxx xxx xxx
Accordingly, the mere fact that Liddell & Co. and
Liddell Motors, Inc. are corporations owned and
controlled by Frank Liddell directly or indirectly
is not by itself sufficient to justify the disregard
of the separate corporate identity of one from the
other. There is however, in this instant case, a
peculiar sequence of the organization and
activities of Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering
"the legal right of a tax payer to decrease the
amount of what otherwise would be his taxes, or
altogether avoid them, by means which the law
permits, cannot be doubted". But as held in
another case, "where a corporation is a dummy,
is unreal or a sham and serves no business
purpose and is intended only as a blind, the
corporate form may be ignored for the law
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 revenue officers 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 person accordingly taxable.
subsidiary or branch of the latter created for the
purpose of selling the vehicles at retail (here
concrete blocks) ... .
It may not be amiss to state in this connection,
the advantages to Norton in maintaining a
semblance of separate entities. If the income of
Norton should be considered separate from the
income of Jackbilt, then each would declare
such earning separately for income tax purposes
and thus pay lesser income tax. The combined
taxable Norton-Jackbilt income would subject
Norton to a higher tax. Based upon the
1954-1955 income tax return of Norton and
Jackbilt (Exhs. 7 & 8), and assuming that both
of them are operating on the same fiscal basis
and their returns are accurate, we would have
the following result: Jackbilt declared a taxable
net income of P161,202.31 in which the income
tax due was computed at P37,137.00 (Exh. 8);
whereas Norton declared as taxable, a net
income of P120,101.59, on which the income tax
due was computed at P25,628.00. The total of
these liabilities is P50,764.84. On the other
hand, if the net taxable earnings of both
corporations are combined, 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 the
corporations should be regarded as separate
entities.

... to allow a taxpayer to deny tax liability on the

ground that the sales were made through
another and distinct corporation when it is
proved that the latter is virtually owned by the
former or that they are practically one and the
same is to sanction a circumvention of our tax
laws. (and cases cited therein.)

In the case of Yutivo Sons Hardware Co. v. Court

of Tax Appeals, L-13203, Jan. 28, 1961, this
Court made a similar ruling where the
circumstances of unity of corporate identities
have been shown and which are identical to
those obtaining in the case under consideration.
Therein, this Court said:

We are, however, inclined to agree with the court

below that SM was actually owned and
controlled by petitioner as to make it a mere