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SECOND DIVISION completion or abandonment of the Works as to the On July 28, 2003, the trial court issued the

as to the On July 28, 2003, the trial court issued the order directing between BF Corporation and Shangri-La.[40] Provisions including
G.R. No. 174938, October 01, 2014 construction of this Contract or as to any matter or thing of service of demands for arbitration upon all defendants in BF arbitration stipulations should bind only the parties.[41] Based on
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, PETITIONERS, whatsoever nature arising thereunder or in connection Corporation's complaint.[25] According to the trial court, our arbitration laws, parties who are strangers to an agreement
VS. BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO therewith (including any matter or thing left by this Contract to Shangri-La's directors were interested parties who "must also be cannot be compelled to arbitrate.[42]
C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND the discretion of the Project Manager or the withholding by the served with a demand for arbitration to give them the
BENJAMIN C. RAMOS, RESPONDENTS. Project Manager of any certificate to which the Contractor opportunity to ventilate their side of the controversy, safeguard Petitioners point out that our arbitration laws were enacted to
may claim to be entitled or the measurement and valuation their interest and fend off their respective positions."[26] promote the autonomy of parties in resolving their disputes.[43]
DECISION mentioned in clause 30(5)(a) of these Conditions or the rights Petitioners' motion for reconsideration of this order was denied Compelling them to submit to arbitration is against this purpose
LEONEN, J.: and liabilities of the parties under clauses 25, 26, 32 or 33 of by the trial court on January 19, 2005.[27] and may be tantamount to stipulating for the parties.[44]
Corporate representatives may be compelled to submit to these Conditions), the owner and the Contractor hereby agree
arbitration proceedings pursuant to a contract entered into by to exert all efforts to settle their differences or dispute amicably. Petitioners filed a petition for certiorari with the Court of Separate comments on the petition were filed by BF
the corporation they represent if there are allegations of bad Failing these efforts then such dispute or difference shall be Appeals, alleging grave abuse of discretion in the issuance of Corporation, and Maximo G. Licauco III, Alfredo C. Ramos and
faith or malice in their acts representing the corporation. referred to arbitration in accordance with the rules and orders compelling them to submit to arbitration proceedings Benjamin C. Ramos.[45]
procedures of the Philippine Arbitration Law. despite being third parties to the contract between Shangri-La
This is a Rule 45 petition, assailing the Court of Appeals' May 11, xxx xxx xxx and BF Corporation.[28] Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C.
2006 decision and October 5, 2006 resolution. The Court of Ramos agreed with petitioners that Shangri-La's directors, being
Appeals affirmed the trial court's decision holding that (6) The award of such Arbitrators shall be final and binding on In its May 11, 2006 decision,[29] the Court of Appeals dismissed non-parties to the contract, should not be made personally
petitioners, as directors, should submit themselves as parties to the parties. The decision of the Arbitrators shall be a condition petitioners' petition for certiorari. The Court of Appeals ruled liable for Shangri-La's acts.[46] Since the contract was executed
the arbitration proceedings between BF Corporation and precedent to any right of legal action that either party may that Shangri-La's directors were necessary parties in the only by BF Corporation and Shangri-La, only they should be
Shangri-La Properties, Inc. (Shangri-La). have against the other. . . .[12] (Underscoring in the original) arbitration proceedings.[30] According to the Court of Appeals: affected by the contract's stipulation.[47] BF Corporation also
[They were] deemed not third-parties to the contract as they failed to specifically allege the unlawful acts of the directors
In 1993, BF Corporation filed a collection complaint with the On August 19, 1993, BF Corporation opposed the motion to [were] sued for their acts in representation of the party to the that should make them solidarity liable with Shangri-La for its
Regional Trial Court against Shangri-La and the members of its suspend proceedings.[13] contract pursuant to Art. 31 of the Corporation Code, and that obligations.[48]
board of directors: Alfredo C. Ramos, Rufo B. Colayco, Antonio as directors of the defendant corporation, [they], in
O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and In the November 18, 1993 order, the Regional Trial Court denied accordance with Art. 1217 of the Civil Code, stand to be Meanwhile, in its comment, BF Corporation argued that the
Benjamin C. Ramos.[1] the motion to suspend proceedings.[14] benefited or injured by the result of the arbitration proceedings, courts' ruling that the parties should undergo arbitration "clearly
hence, being necessary parties, they must be joined in order to contemplated the inclusion of the directors of the
BF Corporation alleged in its complaint that on December 11, On December 8, 1993, petitioners filed an answer to BF have complete adjudication of the controversy. Consequently, corporation[.]"[49]
1989 and May 30, 1991, it entered into agreements with Corporation's complaint, with compulsory counterclaim against if [they were] excluded as parties in the arbitration proceedings
Shangri-La wherein it undertook to construct for Shangri-La a BF Corporation and cross-claim against Shangri-La.[15] They and an arbitral award is rendered, holding [Shangri-La] and its BF Corporation also argued that while petitioners were not
mall and a multilevel parking structure along EDSA.[2] alleged that they had resigned as members of Shangri-La's board of directors jointly and solidarity liable to private parties to the agreement, they were still impleaded under
board of directors as of July 15, 1991.[16] respondent BF Corporation, a problem will arise, i.e., whether Section 31 of the Corporation Code.[50] Section 31 makes
Shangri-La had been consistent in paying BF Corporation in petitioners will be bound by such arbitral award, and this will directors solidarity liable for fraud, gross negligence, and bad
accordance with its progress billing statements.[3] However, by After the Regional Trial Court denied on February 11, 1994 the prevent complete determination of the issues and resolution of faith.[51] Petitioners are not really third parties to the agreement
October 1991, Shangri-La started defaulting in payment.[4] motion for reconsideration of its November 18, 1993 order, the controversy.[31] because they are being sued as Shangri-La's representatives,
Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. under Section 31 of the Corporation Code.[52]
BF Corporation alleged that Shangri-La induced BF Corporation Licauco III, and Benjamin Ramos filed a petition for certiorari The Court of Appeals further ruled that "excluding petitioners in
to continue with the construction of the buildings using its own with the Court of Appeals.[17] the arbitration proceedings . . . would be contrary to the policy BF Corporation further argued that because petitioners were
funds and credit despite Shangri-La's default.[5] According to BF against multiplicity of suits."[32] impleaded for their solidary liability, they are necessary parties
Corporation, Shangri-La misrepresented that it had funds to pay On April 28, 1995, the Court of Appeals granted the petition for to the arbitration proceedings.[53] The full resolution of all
for its obligations with BF Corporation, and the delay in certiorari and ordered the submission of the dispute to The dispositive portion of the Court of Appeals' decision reads: disputes in the arbitration proceedings should also be done in
payment was simply a matter of delayed processing of BF arbitration.[18] WHEREFORE, the petition is DISMISSED. The assailed orders dated the interest of justice.[54]
Corporation's progress billing statements.[6] July 28, 2003 and January 19, 2005 of public respondent RTC,
Aggrieved by the Court of Appeals' decision, BF Corporation Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED.[33] In the manifestation dated September 6, 2007, petitioners
BF Corporation eventually completed the construction of the filed a petition for review on certiorari with this court.[19] On informed the court that the Arbitral Tribunal had already
buildings.[7] Shangri-La allegedly took possession of the buildings March 27, 1998, this court affirmed the Court of Appeals' The Court of Appeals denied petitioners' motion for promulgated its decision on July 31, 2007.[55] The Arbitral Tribunal
while still owing BF Corporation an outstanding balance.[8] decision, directing that the dispute be submitted for reconsideration in the October 5, 2006 resolution.[34] denied BF Corporation's claims against them.[56] Petitioners
arbitration.[20] stated that "[they] were included by the Arbitral Tribunal in the
BF Corporation alleged that despite repeated demands, On November 24, 2006, petitioners filed a petition for review of proceedings conducted . . . notwithstanding [their] continuing
Shangri-La refused to pay the balance owed to it.[9] It also Another issue arose after BF Corporation had initiated the May 11, 2006 Court of Appeals decision and the October 5, objection thereto. . . ."[57] They also stated that "[their] unwilling
alleged that the Shangri-La's directors were in bad faith in arbitration proceedings. BF Corporation and Shangri-La failed 2006 Court of Appeals resolution.[35] participation in the arbitration case was done ex abundante
directing Shangri-La's affairs. Therefore, they should be held to agree as to the law that should govern the arbitration ad cautela, as manifested therein on several occasions."[58]
jointly and severally liable with Shangri-La for its obligations as proceedings.[21] On October 27, 1998, the trial court issued the The issue in this case is whether petitioners should be made Petitioners informed the court that they already manifested
well as for the damages that BF Corporation incurred as a result order directing the parties to conduct the proceedings in parties to the arbitration proceedings, pursuant to the with the trial court that "any action taken on [the Arbitral
of Shangri-La's default.[10] accordance with Republic Act No. 876.[22] arbitration clause provided in the contract between BF Tribunal's decision] should be without prejudice to the resolution
Corporation and Shangri-La. of [this] case."[59]
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Shangri-La filed an omnibus motion and BF Corporation an
Colayco, Maximo G. Licauco III, and Benjamin C. Ramos filed a urgent motion for clarification, both seeking to clarify the term, Petitioners argue that they cannot be held personally liable for Upon the court's order, petitioners and Shangri-La filed their
motion to suspend the proceedings in view of BF Corporation's "parties," and whether Shangri-La's directors should be included corporate acts or obligations.[36] The corporation is a separate respective memoranda. Petitioners and Maximo G. Licauco III,
failure to submit its dispute to arbitration, in accordance with in the arbitration proceedings and served with separate being, and nothing justifies BF Corporation's allegation that they Alfredo C. Ramos, and Benjamin C. Ramos reiterated their
the arbitration clause provided in its contract, quoted in the demands for arbitration.[23] are solidarity liable with Shangri-La.[37] Neither did they bind arguments that they should not be held liable for Shangri-La's
motion as follows:[11] themselves personally nor did they undertake to shoulder default and made parties to the arbitration proceedings
35. Arbitration Petitioners filed their comment on Shangri-La's and BF Shangri-La's obligations should it fail in its obligations.[38] BF because only BF Corporation and Shangri-La were parties to
Corporation's motions, praying that they be excluded from the Corporation also failed to establish fraud or bad faith on their the contract.
(1) Provided always that in case any dispute or difference shall arbitration proceedings for being non-parties to Shangri-La's part.[39]
arise between the Owner or the Project Manager on his behalf and BF Corporation's agreement.[24] In its memorandum, Shangri-La argued that petitioners were
and the Contractor, either during the progress or after the Petitioners also argue that they are third parties to the contract impleaded for their solidary liability under Section 31 of the
Corporation Code. Shangri-La added that their exclusion from be granted that it agreed to submit its dispute with plaintiff to SEC. 25. Interpretation of the Act. - In interpreting the Act, the subject to the limitations prescribed by law and the
the arbitration proceedings will result in multiplicity of suits, arbitration, said agreement is void and without effect for it court shall have due regard to the policy of the law in favor of Constitution;
which "is not favored in this jurisdiction."[60] It pointed out that amounts to removing said dispute from the jurisdiction of the arbitration. Where action is commenced by or against multiple
the case had already been mooted by the termination of the courts in which the parties are domiciled or where the dispute parties, one or more of whom are parties who are bound by 8. To enter into merger or consolidation with other corporations
arbitration proceedings, which petitioners actively participated occurred. It is true that there are authorities which hold that "a the arbitration agreement although the civil action may as provided in this Code;
in.[61] Moreover, BF Corporation assailed only the correctness of clause in a contract providing that all matters in dispute continue as to those who are not bound by such arbitration
the Arbitral Tribunal's award and not the part absolving Shangri- between the parties shall be referred to arbitrators and to them agreement. (Emphasis supplied) 9. To make reasonable donations, including those for the public
La's directors from liability.[62] alone, is contrary to public policy and cannot oust the courts of welfare or for hospital, charitable, cultural, scientific, civic, or
jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57 Thus, if there is an interpretation that would render effective an similar purposes: Provided, That no corporation, domestic or
BF Corporation filed a counter-manifestation with motion to Phil., 600, 603), however, there are authorities which favor "the arbitration clause for purposes of avoiding litigation and foreign, shall give donations in aid of any political party or
dismiss[63] in lieu of the required memorandum. more intelligent view that arbitration, as an inexpensive, expediting resolution of the dispute, that interpretation shall be candidate or for purposes of partisan political activity;
speedy and amicable method of settling disputes, and as a adopted.
In its counter-manifestation, BF Corporation pointed out that means of avoiding litigation, should receive every 10. To establish pension, retirement, and other plans for the
since "petitioners' counterclaims were already dismissed with encouragement from the courts which may be extended Petitioners' main argument arises from the separate personality benefit of its directors, trustees, officers and employees; and
finality, and the claims against them were likewise dismissed without contravening sound public policy or settled law" (3 Am. given to juridical persons vis-a-vis their directors, officers,
with finality, they no longer have any interest or personality in Jur., p. 835). Congress has officially adopted the modern view stockholders, and agents. Since they did not sign the arbitration 11. To exercise such other powers as may be essential or
the arbitration case. Thus, there is no longer any need to when it reproduced in the new Civil Code the provisions of the agreement in any capacity, they cannot be forced to submit necessary to carry out its purpose or purposes as stated in its
resolve the present Petition, which mainly questions the old Code on Arbitration. And only recently it approved to the jurisdiction of the Arbitration Tribunal in accordance with articles of incorporation. (13a)
inclusion of petitioners in the arbitration proceedings."[64] The Republic Act No. 876 expressly authorizing arbitration of future the arbitration agreement. Moreover, they had already
court's decision in this case will no longer have any effect on disputes.[72] (Emphasis supplied) resigned as directors of Shangri-La at the time of the alleged Because a corporation's existence is only by fiction of law, it
the issue of petitioners' inclusion in the arbitration default. can only exercise its rights and powers through its directors,
proceedings.[65] In view of our policy to adopt arbitration as a manner of settling officers, or agents, who are all natural persons. A corporation
disputes, arbitration clauses are liberally construed to favor Indeed, as petitioners point out, their personalities as directors cannot sue or enter into contracts without them.
The petition must fail. arbitration. Thus, in LM Power Engineering Corporation v. of Shangri-La are separate and distinct from Shangri-La.
Capitol Industrial Construction Groups, Inc.,[73] this court said: A consequence of a corporation's separate personality is that
The Arbitral Tribunal's decision, absolving petitioners from Being an inexpensive, speedy and amicable method of settling A corporation is an artificial entity created by fiction of law.[76] consent by a corporation through its representatives is not
liability, and its binding effect on BF Corporation, have disputes, arbitration — along with mediation, conciliation and This means that while it is not a person, naturally, the law gives it consent of the representative, personally. Its obligations,
rendered this case moot and academic. negotiation — is encouraged by the Supreme Court. Aside a distinct personality and treats it as such. A corporation, in the incurred through official acts of its representatives, are its own.
from unclogging judicial dockets, arbitration also hastens the legal sense, is an individual with a personality that is distinct and A stockholder, director, or representative does not become a
The mootness of the case, however, had not precluded us from resolution of disputes, especially of the commercial kind. It is separate from other persons including its stockholders, officers, party to a contract just because a corporation executed a )C
resolving issues so that principles may be established for the thus regarded as the "wave of the future" in international civil directors, representatives,[77] and other juridical entities. contract through that stockholder, director or representative.
guidance of the bench, bar, and the public. In De la Camara and commercial disputes. Brushing aside a contractual
v. Hon. Enage,[66] this court disregarded the fact that petitioner agreement calling for arbitration between the parties would be The law vests in corporations rights, powers, and attributes as if Hence, a corporation's representatives are generally not bound
in that case already escaped from prison and ruled on the a step backward. they were natural persons with physical existence and by the terms of the contract executed by the corporation. They
issue of excessive bails: capabilities to act on their own.[78] For instance, they have the are not personally liable for obligations and liabilities incurred
While under the circumstances a ruling on the merits of the Consistent with the above-mentioned policy of encouraging power to sue and enter into transactions or contracts. Section on or in behalf of the corporation.
petition for certiorari is not warranted, still, as set forth at the alternative dispute resolution methods, courts should liberally 36 of the Corporation Code enumerates some of a
opening of this opinion, the fact that this case is moot and construe arbitration clauses. Provided such clause is corporation's powers, thus: Petitioners are also correct that arbitration promotes the
academic should not preclude this Tribunal from setting forth in susceptible of an interpretation that covers the asserted Section 36. Corporate powers and capacity. - Every parties' autonomy in resolving their disputes. This court
language clear and unmistakable, the obligation of fidelity on dispute, an order to arbitrate should be granted. Any doubt corporation incorporated under this Code has the power and recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
the part of lower court judges to the unequivocal command of should be resolved in favor of arbitration.[74] (Emphasis supplied) capacity: Corporation[79] that an arbitration clause shall not apply to
the Constitution that excessive bail shall not be required.[67] persons who were neither parties to the contract nor assignees
A more clear-cut statement of the state policy to encourage 1. To sue and be sued in its corporate name; of previous parties, thus:
This principle was repeated in subsequent cases when this court arbitration and to favor interpretations that would render A submission to arbitration is a contract. As such, the
deemed it proper to clarify important matters for guidance.[68] effective an arbitration clause was later expressed in Republic 2. Of succession by its corporate name for the period of time Agreement, containing the stipulation on arbitration, binds the
Act No. 9285:[75] stated in the articles of incorporation and the certificate of parties thereto, as well as their assigns and heirs. But only
Thus, we rule that petitioners may be compelled to submit to SEC. 2. Declaration of Policy. - It is hereby declared the policy incorporation; they.[80] (Citations omitted)
the arbitration proceedings in accordance with Shangri-La and of the State to actively promote party autonomy in the
BF Corporation's agreement, in order to determine if the resolution of disputes, or the freedom of the party to make their 3. To adopt and use a corporate seal; Similarly, in Del Monte Corporation-USA v. Court of Appeals,[81]
distinction between Shangri-La's personality and their own arrangements to resolve their disputes. Towards this end, this court ruled:
personalities should be disregarded. the State shall encourage and actively promote the use of 4. To amend its articles of incorporation in accordance with the The provision to submit to arbitration any dispute arising
Alternative Dispute Resolution (ADR) as an important means to provisions of this Code; therefrom and the relationship of the parties is part of that
This jurisdiction adopts a policy in favor of arbitration. Arbitration achieve speedy and impartial justice and declog court contract and is itself a contract. As a rule, contracts are
allows the parties to avoid litigation and settle disputes dockets. As such, the State shall provide means for the use of 5. To adopt by-laws, not contrary to law, morals, or public respected as the law between the contracting parties and
amicably and more expeditiously by themselves and through ADR as an efficient tool and an alternative procedure for the policy, and to amend or repeal the same in accordance with produce effect as between them, their assigns and heirs.
their choice of arbitrators. resolution of appropriate cases. Likewise, the State shall enlist this Code; Clearly, only parties to the Agreement . . . are bound by the
active private sector participation in the settlement of disputes Agreement and its arbitration clause as they are the only
The policy in favor of arbitration has been affirmed in our Civil through ADR. This Act shall be without prejudice to the 6. In case of stock corporations, to issue or sell stocks to signatories thereto.[82] (Citation omitted)
Code,[69] which was approved as early as 1949. It was later adoption by the Supreme Court of any ADR system, such as subscribers and to sell treasury stocks in accordance with the
institutionalized by the approval of Republic Act No. 876, [70] mediation, conciliation, arbitration, or any combination thereof provisions of this Code; and to admit members to the This court incorporated these rulings in Agan, Jr. v. Philippine
which expressly authorized, made valid, enforceable, and as a means of achieving speedy and efficient means of corporation if it be a non-stock corporation; International Air Terminals Co., Inc.[83] and Stanfilco Employees
irrevocable parties' decision to submit their controversies, resolving cases pending before all courts in the Philippines v. DOLE Philippines, Inc., et al.[84]
including incidental issues, to arbitration. This court recognized which shall be governed by such rules as the Supreme Court 7. To purchase, receive, take or grant, hold, convey, sell, lease,
this policy in Eastboard Navigation, Ltd. v. Ysmael and may approve from time to time. pledge, mortgage and otherwise deal with such real and As a general rule, therefore, a corporation's representative who
Company, Inc.:[71] personal property, including securities and bonds of other did not personally bind himself or herself to an arbitration
As a corollary to the question regarding the existence of an .... corporations, as the transaction of the lawful business of the agreement cannot be forced to participate in arbitration
arbitration agreement, defendant raises the issue that, even if it corporation may reasonably and necessarily require, proceedings made pursuant to an agreement entered into by
the corporation. He or she is generally not considered a party b) "When a director, trustee or officer has contractually
to that agreement. agreed or stipulated to hold himself personally and In that case, this court recognized that persons other than the
solidarity liable with the corporation";[88] and main party may be compelled to submit to arbitration, e.g.,
However, there are instances when the distinction between c) "When a director, trustee or officer is made, by specific assignees and heirs. Assignees and heirs may be considered
personalities of directors, officers, and representatives, and of provision of law, personally liable for his corporate parties to an arbitration agreement entered into by their
the corporation, are disregarded. We call this piercing the veil action."[89] assignor because the assignor's rights and obligations are
of corporate fiction. transferred to them upon assignment. In other words, the
assignor's rights and obligations become their own rights and
Piercing the corporate veil is warranted when "[the separate When there are allegations of bad faith or malice against obligations. In the same way, the corporation's obligations are
personality of a corporation] is used as a means to perpetrate corporate directors or representatives, it becomes the duty of treated as the representative's obligations when the corporate
fraud or an illegal act, or as a vehicle for the evasion of an courts or tribunals to determine if these persons and the veil is pierced.
existing obligation, the circumvention of statutes, or to confuse corporation should be treated as one. Without a trial, courts
legitimate issues."[85] It is also warranted in alter ego cases and tribunals have no basis for determining whether the veil of Moreover, in Heirs of Angus to Salas, this court affirmed its policy
"where a corporation is merely a farce since it is a mere alter corporate fiction should be pierced. Courts or tribunals do not against multiplicity of suits and unnecessary delay. This court
ego or business conduit of a person, or where the corporation is have such prior knowledge. Thus, the courts or tribunals must said that "to split the proceeding into arbitration for some
so organized and controlled and its affairs are so conducted as first determine whether circumstances exist to warrant the parties and trial for other parties would "result in multiplicity of
to make it merely an instrumentality, agency, conduit or courts or tribunals to disregard the distinction between the suits, duplicitous procedure and unnecessary delay."[91] This
adjunct of another corporation."[86] corporation and the persons representing it. The determination court also intimated that the interest of justice would be best
of these circumstances must be made by one tribunal or court observed if it adjudicated rights in a single proceeding.[92] While
When corporate veil is pierced, the corporation and persons in a proceeding participated in by all parties involved, the facts of that case prompted this court to direct the trial
who are normally treated as distinct from the corporation are including current representatives of the corporation, and those court to proceed to determine the issues of that case, it did not
treated as one person, such that when the corporation is persons whose personalities are impliedly the same as the prohibit' courts from allowing the case to proceed to
adjudged liable, these persons, too, become liable as if they corporation. This is because when the court or tribunal finds arbitration, when circumstances warrant.
were the corporation. that circumstances exist warranting the piercing of the
corporate veil, the corporate representatives are treated as the Hence, the issue of whether the corporation's acts in violation
Among the persons who may be treated as the corporation corporation itself and should be held liable for corporate acts. of complainant's rights, and the incidental issue of whether
itself under certain circumstances are its directors and officers. The corporation's distinct personality is disregarded, and the piercing of the corporate veil is warranted, should be
Section 31 of the Corporation Code provides the instances corporation is seen as a mere aggregation of persons determined in a single proceeding. Such finding would
when directors, trustees, or officers may become liable for undertaking a business under the collective name of the determine if the corporation is merely an aggregation of
corporate acts: corporation. persons whose liabilities must be treated as one with the
Sec. 31. Liability of directors, trustees or officers. - Directors or corporation.
trustees who willfully and knowingly vote for or assent to Hence, when the directors, as in this case, are impleaded in a
patently unlawful acts of the corporation or who are guilty of case against a corporation, alleging malice or bad faith on However, when the courts disregard the corporation's distinct
gross negligence or bad faith in directing the affairs of the their part in directing the affairs of the corporation, and separate personality from its directors or officers, the courts
corporation or acquire any personal or pecuniary interest in complainants are effectively alleging that the directors and the do not say that the corporation, in all instances and for all
conflict with their duty as such directors or trustees shall be corporation are not acting as separate entities. They are purposes, is the same as its directors, stockholders, officers, and
liable jointly and severally for all damages resulting therefrom alleging that the acts or omissions by the corporation that agents. It does not result in an absolute confusion of
suffered by the corporation, its stockholders or members and violated their rights are also the directors' acts or omissions. [90] personalities of the corporation and the persons composing or
other persons. They are alleging that contracts executed by the corporation representing it. Courts merely discount the distinction and treat
are contracts executed by the directors. Complainants them as one, in relation to a specific act, in order to extend the
When a director, trustee or officer attempts to acquire or effectively pray that the corporate veil be pierced because terms of the contract and the liabilities for all damages to erring
acquires, in violation of his duty, any interest adverse to the the cause of action between the corporation and the directors corporate officials who participated in the corporation's illegal
corporation in respect of any matter which has been reposed is the same. acts. This is done so that the legal fiction cannot be used to
in him in confidence, as to which equity imposes a disability perpetrate illegalities and injustices.
upon him to deal in his own behalf, he shall be liable as a In that case, complainants have no choice but to institute only
trustee for the corporation and must account for the profits one proceeding against the parties. Under the Rules of Court, Thus, in cases alleging solidary liability with the corporation or
which otherwise would have accrued to the corporation, (n) filing of multiple suits for a single cause of action is prohibited. praying for the piercing of the corporate veil, parties who are
Institution of more than one suit for the same cause of action normally treated as distinct individuals should be made to
Based on the above provision, a director, trustee, or officer of a constitutes splitting the cause of action, which is a ground for participate in the arbitration proceedings in order to determine
corporation may be made solidarily liable with it for all the dismissal of the others. Thus, in Rule 2: if such distinction should indeed be disregarded and, if so, to
damages suffered by the corporation, its stockholders or Section 3. One suit for a single cause of action. — A party may determine the extent of their liabilities.
members, and other persons in any of the following cases: not institute more than one suit for a single cause of action. (3a)
a) The director or trustee willfully and knowingly voted for or In this case, the Arbitral Tribunal rendered a decision, finding
assented to a patently unlawful corporate act; Section 4. Splitting a single cause of action; effect of. — If two that BF Corporation failed to prove the existence of
b) The director or trustee was guilty of gross negligence or or more suits are instituted on the basis of the same cause of circumstances that render petitioners and the other directors
bad faith in directing corporate affairs; and action, the filing of one or a judgment upon the merits in any solidarity liable. It ruled that petitioners and Shangri-La's other
c) The director or trustee acquired personal or pecuniary one is available as a ground for the dismissal of the others. (4a) directors were not liable for the contractual obligations of
interest in conflict with his or her duties as director or Shangri-La to BF Corporation. The Arbitral Tribunal's decision was
trustee. It is because the personalities of petitioners and the corporation made with the participation of petitioners, albeit with their
may later be found to be indistinct that we rule that petitioners continuing objection. In view of our discussion above, we rule
may be compelled to submit to arbitration. that petitioners are bound by such decision.
Solidary liability with the corporation will also attach in the
following instances: However, in ruling that petitioners may be compelled to submit WHEREFORE, the petition is DENIED. The Court of Appeals'
a) "When a director or officer has consented to the to the arbitration proceedings, we are not overturning Heirs of decision of May 11, 2006 and resolution of October 5, 2006 are
issuance of watered stocks or who, having knowledge Angus to Salas wherein this court affirmed the basic arbitration AFFIRMED.
thereof, did not forthwith file with the corporate secretary principle that only parties to an arbitration agreement may be
his written objection thereto";[87] compelled to submit to arbitration. SO ORDERED.
THIRD DIVISION Inc. (CKCS, Inc.) being a corporation with whom Texas discovery of such falsity or fraud (Section 223, Tax Petitioner filed a motion for reconsideration but the CA denied
G.R. No. 167560, September 17, 2008 Instruments and Club John Hay entered into a contract, Code). Hence, the assessments have not prescribed. the same in its October 10, 2002 Resolution.[13]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. Petitioner [respondent] submitted to BIR Baguio a photocopy of 8. Petitioner's [respondent's] allegation that the
DOMINADOR MENGUITO, RESPONDENT. the SEC Registration of Copper Kettle Catering Services, Inc. on assessments were not properly addressed is Hence, herein recourse to the Court for the reversal of the CA
March 23, 1999 (pp. 134-141, BIR Records). rendered moot and academic by his decision and resolution on the following grounds:
DECISION acknowledgment in his protest letter dated I
AUSTRIA-MARTINEZ, J.: On April 12, 1999, BIR Baguio wrote a letter to Spouses September 28, 1997 that he received the
Before the Court is a Petition for Review on Certiorari under Rule Menguito, informing the latter that a reinvestigation or assessments. The Court of Appeals erred in reversing the decision of the
45 of the Rules of Court, assailing the March 31, 2005 Decision[1] reconsideration cannot be given due course by the mere 9. Respondent [petitioner] complied with the provisions Court of Tax Appeals and in holding that Copper Kettle
of the Court of Appeals (CA) which reversed and set aside the submission of an uncertified photocopy of the Certificate of of Revenue Regulations No. 12-85 by informing Cafeteria Specialist owned by respondent and Copper Kettle
Court of Tax Appeals (CTA) April 2, 2002 Decision[2] and Incorporation. Thus, it avers that the amendment issued is still petitioner [respondent] of the findings of the Catering Services, Inc. owned and managed by respondent's
October 10, 2002 Resolution[3] ordering Dominador Menguito valid and enforceable. investigation in letters dated July 28, 1997 and wife are not one and the same.
(respondent) to pay the Commissioner of Internal Revenue August 11, 1997 prior to the issuance of the II
(petitioner) deficiency income and percentage taxes and On May 26, 1999, Petitioner [respondent] filed the present case, assessments.
delinquency interest. praying for the cancellation and withdrawal of the deficiency 10. Petitioner [respondent] did not allege in his The Court of Appeals erred in holding that respondent was
income tax and percentage tax assessments on account of administrative protest that there was a duplication of denied due process for failure of petitioner to validly serve
Based on the Joint Stipulation of Facts and Admissions [4] of the prescription, whimsical factual findings, violation of procedural investigation, that the assessments have prescribed, respondent with the post-reporting and pre-assessment notices
parties, the CTA summarized the factual and procedural due process on the issuance of assessment notices, erroneous that they were not properly addressed, or that the as required by law.
antecedents of the case, the relevant portions of which read: address of notices and multiple credit/ investigation by the provisions of Revenue Regulations No. 12-85 were On the first issue, the CTA has ruled that CKCS, Inc. and CKCS
Petitioner Dominador Menguito [herein respondent] is a Filipino Respondent [petitioner] of Petitioner's [respondent's] books of not observed. Not having raised them in the are one and the same corporation because "[t]he contract
citizen, of legal age, married to Jeanne Menguito and is accounts and other related records for the same tax year. administrative level, petitioner [respondent] cannot between Texas Instruments and Copper Kettle was signed by
engaged in the restaurant and/or cafeteria business. For the raise the same for the first time on appeal (Aguinaldo petitioner's [respondent's] wife, Jeanne Menguito as
years 1991, 1992 and 1993, its principal place of business was at Instead of filing an Answer, Respondent [herein petitioner] Industries Corp. vs. Commissioner of Internal proprietress."[14]
Gloriamaris, CCP Complex, Pasay City and later transferred to moved to dismiss the instant petition on July 1, 1999, on the Revenue, 112 SCRA 136).
Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS), ground of lack of jurisdiction. According to Respondent 11. The assessments were issued in accordance with law However, the CA reversed the CTA on these grounds:
Departure Area, Ninoy Aquino International Airport, Pasay City. [petitioner], the assessment had long become final and and regulations. Respondent's [herein petitioner's] allegation that Copper Kettle
During the same years, he also operated a branch at Club executory when Petitioner [respondent] failed to comply with 12. All presumptions are in favor of the correctness of tax Catering Services, Inc. and Copper Kettle Cafeteria Specialists
John Hay, Baguio City carrying the business name of Copper the letter dated October 10, 1997. assessments (CIR vs. Construction Resources of Asia, are not distinct entities and that the under-declared
Kettle Cafeteria Specialist (Joint Stipulation of Facts and Inc., 145 SCRA 67), and the burden to prove sales/revenues of Copper Kettle Catering Services, Inc. pertain
Admissions, p. 133, CTA records). Petitioner opposed said motion on July 21, 1999, claiming that otherwise is upon petitioner [respondent].[5] to Copper Kettle Cafeteria Specialist are belied by the
the final decision on Petitioner's [respondent's] protest is the (Emphasis supplied) evidence on record. In the Joint Stipulation of Facts submitted
xxxx April 12, 1999 letter of the Baguio Regional Office; therefore, the On April 2, 2002, the CTA rendered a Decision, the dispositive before the tax court, respondent [petitioner] admitted "that
filing of the action within thirty (30) days from receipt of the said portion of which reads: petitioner's [herein respondent's] business name is Copper
Subsequently, BIR Baguio received information that Petitioner letter was seasonably filed. Moreover, Petitioner [respondent] Accordingly, Petitioner [herein respondent] is ORDERED to PAY Kettle Cafeteria Specialist."
[herein respondent] has undeclared income from Texas asserted that granting that the April 12, 1999 letter in question the Respondent [herein petitioner] the amount of
Instruments and Club John Hay, prompting the BIR to conduct could not be construed to mean as a denial or final decision of P11,333,233.94 and P2,573,655.82 as deficiency income and Also, the Certification of Club John Hay and Letter dated July 9,
another investigation. Through a letter dated July 28, 1997, the protest, still Petitioner's [respondent's] appeal was timely percentage tax liabilities, respectively for taxable years 1991, 1997 of Texas Instruments both addressed to respondent
Spouses Dominador Menguito and Jeanne Menguito (Spouses filed since Respondent [petitioner] issued a Warrant of Distraint 1992 and 1993 plus 20% delinquency interest from October 2, indicate that these companies transacted with Copper Kettle
Menguito) were informed by the Assessment Division of the said and/or Levy against the Petitioner [respondent] on May 3, 1999, 1997 until full payment thereof. Catering Services, Inc., owned and managed by JEANNE G.
office that they have underdeclared sales totaling which warrant constituted a final decision of the Respondent MENGUITO, NOT petitioner Dominador Menguito. The alleged
P48,721,555.96 (Exhibit 11, p. 83, BIR records). This was followed [petitioner] on the protest of the taxpayer. SO ORDERED.[6] under-declared sales income subject of the present
by a Preliminary Ten (10) Day Letter dated August 11, 1997, On September 3, 1999, this Court denied Respondent's Respondent filed a motion for reconsideration but the CTA assessments were shown to have been earned by Copper
informing Petitioner [herein respondent] that in the investigation [petitioner's] 'Motion to Dismiss' for lack of merit. denied the same in its Resolution of October 10, 2002.[7] Kettle Catering Services, Inc. in its commercial transaction with
of his 1991, 1992 and 1993 income, business and withholding Texas Instruments and Camp John Hay; NOT by petitioner's
tax case, it was found out that there is still due from him the Respondent [petitioner] filed his Answer on September 24, 1999, Through a Petition for Review[8] filed with the CA, respondent dealing with these companies. In fact, there is nothing on
total sum of P34,193,041.55 as deficiency income and raising the following Special and Affirmative Defenses: questioned the CTA Decision and Resolution mainly on the record which shows that Texas Instruments and Camp John Hay
percentage tax. ground that Copper Kettle Catering Services, Inc. (CKCS, Inc.) conducted business relations with Copper Kettle Cafeteria
xxxx was a separate and distinct entity from Copper Kettle Specialist, owned by herein petitioner Dominador Menguito. In
On September 2, 1997, the assessment notices subject of the 5. Investigation disclosed that for taxable years 1991, Cafeteria Specialist (CKCS); the sales and revenues of CKCS, the absence, therefore, of clear and convincing evidence
instant petition were issued. These were protested by Ms. 1992 and 1993, petitioner [respondent] filed false or Inc. could not be ascribed to CKCS; neither may the taxes due showing that Copper Kettle Cafeteria Specialist and Copper
Jeanne Menguito, through a letter dated September 28, 1997 fraudulent income and percentage tax returns with from one, charged to the other; nor the notices to be served Kettle Catering Services, Inc. are one and the same,
(Exhibit 14, p. 112, BIR Records), on the ground that the 40% intent to evade tax by under declaring his sales. on the former, coursed through the latter.[9] Respondent cited respondent can NOT validly impute alleged underdeclared
deduction allowed on their computed gross revenue, is 6. The alleged duplication of investigation of petitioner the Joint Stipulation in which petitioner acknowledged that its sales income earned by Copper Kettle Catering Services, Inc.
unrealistic. Ms. Jeanne Menguito requested for a period of thirty [respondent] by the BIR Regional Office in Baguio (respondent's) business was called Copper Kettle Cafeteria as sales income of Copper Kettle Cafeteria Specialist.[15]
(30) days within which to coordinate with the BIR regarding the City and by the Revenue District Office in Pasay City Specialist, not Copper Kettle Catering Services, Inc.[10] (Emphasis supplied)
contested assessment. is justified by the finding of fraud on the part of the Respondent is adamant that the CA is correct. Many times in
petitioner [respondent], which is an exception to the Based on the unrefuted[11] CTA summary, the CA rendered the the past, the BIR had treated CKCS separately from CKCS, Inc.:
On October 10, 1997, BIR Baguio replied, informing the Spouses provision in the Tax Code that the examination and Decision assailed herein, the dispositive portion of which reads: from May 1994 to June 1995, the BIR sent audit teams to
Menguito that the source of assessment was not through the inspection of books and records shall be made only WHEREFORE, the instant petition is GRANTED. Reversing the examine the books of account and other accounting records
disallowance of claimed expenses but on data received from once in a taxable year (Section 235, Tax Code). At assailed Decision dated April 2, 2002 and Resolution dated of CKCS, and based on said audits, respondent was held liable
Club John Hay and Texas Instruments Phils., Inc. Said letter gave any rate, petitioner [respondent], in a letter dated October 10, 2002, the deficiency income tax and percentage for deficiency taxes, all of which he had paid.[16] Moreover, the
the spouses ten (10) days to present evidence (Exhibit 15, p. July 18, 1994, waived his right to the consolidation of income tax assessments against petitioner in the amounts of certifications[17] issued by Club John Hay and Texas Instruments
110, BIR Records). said investigation. P11,333,233.94 and P2,573,655.82 for taxable years 1991, 1992 identify the concessionaire operating therein as CKCS, Inc.,
7. The aforementioned falsity or fraud was discovered and 1993 plus the 20% delinquency interest thereon are owned and managed by his spouse Jeanne Menguito, and not
In an effort to clear an alleged confusion regarding Copper on August 5, 1997. The assessments were issued on annulled. CKCS.[18]
Kettle Cafeteria Specialist (CKCS) being a sole proprietorship September 2, 1997, or within ten (10) years from the
owned by the Spouses, and Copper Kettle Catering Services, SO ORDERED.[12] Petitioner impugns the findings of the CA, claiming that these
are contradicted by evidence on record consisting of a reply circumstances, to wit: when the owner of one directs and Second, in Exhibit "8"[43] and Exhibit "E,"[44] Texas Instruments based on fraud is 10 years, the CTA ruled that the assessment
to the September 2, 1997 assessment notice of BIR Baguio controls the operations of the other, and the payments identified the concessionaire operating its canteen as "Copper notices issued against respondent on September 2, 1997 were
which Jeanne Menguito wrote on September 28, 1997, to wit: effected or received by one are for the accounts due from or Kettle Catering Services, Inc."[45] and/or "COPPER KETTLE timely because petitioner discovered the falsity in respondent's
We are in receipt of the assessment notice you have sent us, payable to the other;[30] or when the properties or products of CAFETERIA SPECIALIST SVCS."[46] It being settled that tax returns for 1991, 1992 and 1993 only on February 19, 1997.[55]
dated September 2, 1997. Having taken hold of the same only one are all sold to the other, which in turn immediately sells respondent's "Copper Kettle Cafeteria Specialist" is also known Moreover, in accordance with Section 2 of Revenue Regulation
now following our travel overseas, we were not able to respond them to the public,[31] as substantial evidence in support of the as "Copper Kettle Catering Services," and that respondent and No. 12-85, which requires that assessment notices be sent to the
immediately and manifest our protest. Also, with the impending finding that the two are actually one juridical taxable Jeanne Menguito both own, manage and act as proprietors of address indicated in the taxpayer's return, unless the latter gives
termination of our businesses at 19th Tee, Club John Hay and at personality. the business, Exhibit "8" and Exhibit "E" further establish that, a notice of change of address, the assessment notices in the
Texas Instruments, Loakan, Baguio City, we have already through said business, respondent also had taxable present case were sent by petitioner to Camp John Hay, for this
started the transfer of our records and books in Baguio City to In the present case, overwhelming evidence supports the CTA transactions with Texas Instruments. was the address respondent indicated in his tax returns.[56] As to
Manila that we will need more time to review and sort the in disregarding the separate identity of CKCS, Inc. from CKCS whether said assessment notices were actually received, the
records that may have to be presented relative to the and in treating them as one taxable entity. In view of the foregoing facts and circumstances, the Articles of CTA correctly held that since respondent did not testify that he
assessment x x x.[19] (Emphasis supplied) Incorporation of CKCS, Inc. -- a certified true copy of which did not receive said notices, it can be presumed that the same
Petitioner insists that said reply confirms that the assessment First, in respondent's Petition for Review before the CTA, he respondent attached only to his Reply filed with the CA[47] -- were actually sent to and received by the latter. The Court
notice is directed against the businesses which she and her expressly admitted that he "is engaged in restaurant and/or cannot insulate it from scrutiny of its real identity in relation to agrees with the CTA in considering as hearsay the testimony of
husband, respondent herein, own and operate at Club John cafeteria business" and that "[i]n 1991, 1992 and 1993, he also CKCS. It is noted that said Articles of Incorporation of CKCS, Inc. Nalda that respondent did not receive the notices, because
Hay and Texas Instruments, and establishes that she is operated a branch at Club John Hay, Baguio Citywith a was issued in 1989, but documentary evidence indicate that Nalda was not competent to testify on the matter, as she was
protesting said notice not just for herself but also for business name of Copper Kettle Cafeteria Specialist."[32] after said date, CKCS, Inc. has also assumed the name CKCS, employed by respondent only in June 1998, whereas the
respondent.[20] Respondent repeated such admission in the Joint Stipulation. [33] and vice-versa. The most concrete indication of this practice is assessment notices were sent on September 2, 1997.[57]
And then in Exhibit "1"[34] for petitioner, a July 18, 1994 letter sent the 1991 Quarterly Percentage Tax Returns covering the
Moreover, petitioner argues that if it were true that CKCS, Inc. by Jeanne Menguito to BIR, Baguio City, she stated thus: business name/trade "19th Tee Camp John Hay." In said returns, Anent compliance with the requirements of Revenue
and CKCS are separate and distinct entities, respondent could "in connection with the investigation of Copper Kettle Cafeteria the taxpayer is identified as "Copper Kettle Cafeteria Regulation No. 12-85, the CTA held:
have easily produced the articles of incorporation of CKCS, Specialist which is located at 19th Tee Club John Hay, Baguio Specialist"[48] or CKCS, not CKCS, Inc. Yet, in several documents BIR records show that on July 28, 1997, a letter was issued by BIR
Inc.; instead, what respondent presented was merely a City under letter of authority nos. 0392897, 0392898, and already cited, the purported owner of 19th Tee Bar at Club John Baguio to Spouses Menguito, informing the latter of their
photocopy of the incorporation articles.[21] Worse, petitioner 0392690 dated May 16, 1994, investigating my income, Hay is CKCS, Inc. supposed underdeclaration of sales totaling P48,721,555.96 and
adds, said document was not offered in evidence before the business, and withholding taxes for the years 1991, 1992, and giving them 5 days to communicate any objection to the
CTA, but was presented only before the CA.[22] 1993."[35] (Emphasis supplied) All these pieces of evidence buttress the finding of the CTA that results of the investigation (Exhibit 11, p. 83, BIR Records).
Jeanne Menguito signed the letter as proprietor of Copper in 1991, 1992 and 1993, respondent, together with his spouse Records likewise reveal the issuance of a Preliminary Ten (10)
Petitioner further insists that CKCS, Inc. and CKCS are merely Kettle Cafeteria Specialist.[36] Jeanne Menguito, owned and operated outlets in Club John Day Letter on August 11, 1997, informing Petitioner [respondent
employing the fiction of their separate corporate existence to Hay and Texas Instruments under the names Copper Kettle herein] that the sum of P34,193,041.55 is due from him as
evade payment of proper taxes; that the CTA saw through their Related to Exhibit "1" is petitioner's Exhibit "14," which is another Cafeteria Specialist or CKCS and Copper Kettle Catering deficiency income and percentage tax (Exhibit 13, p. 173, BIR
ploy and rightly disregarded their corporate individuality, letter dated September 28, 1997, in which Jeanne Menguito Services or Copper Kettle Catering Services, Inc.. Records). Said letter gave the Petitioner [respondent herein] a
treating them instead as one taxable entity with the same tax protested the September 2, 1997 assessment notices directed period of ten (10) days to submit his objection to the proposed
base and liability;[23] and that the CA should have sustained the at Copper Kettle Cafeteria Specialist and referred to the latter Turning now to the second issue. assessment, either personally or in writing, together with any
CTA.[24] as "our business at 19th Tee Club John Hay and at Texas evidence he may want to present.
Instruments."[37] Taken along with the Joint Stipulation, Exhibits In respondent's Petition for Review with the CTA, he questioned
In effect, petitioner would have the Court resolve a purely "A" through "C" and the August 3, 1993 Certification of Camp the validity of the Assessment Notices,[49] all dated September xxxx
factual issue[25] of whether or not there is substantial evidence John Hay, Exhibits "1" and "14," confirm that respondent, 2, 1997, issued by BIR, Baguio City against him on the following
that CKCS, Inc. and CKCS are one and the same taxable together with his spouse Jeanne Menguito, own, operate and grounds: As to Petitioner's allegation that he was given only ten (10) days
entity. manage a branch of Copper Kettle Cafeteria Specialist, also 1. The assessment notices, based on income and to reply to the findings of deficiency instead of fifteen (15) days
called Copper Kettle Catering Services at Camp John Hay. percentage tax returns filed for 1991, 1992 and 1993, granted to a taxpayer under Revenue Regulations No. 12-85,
As a general rule, the Court does not venture into a trial of facts were issued beyond the three-year prescriptive this Court believes that when Respondent [petitioner herein]
in proceedings under Rule 45 of the Rules of Courts, for its only Moreover, in Exhibits "A" to "A-1,"[38] Exhibits "B" to "B-1"[39] and period under Section 203 of the Tax Code;[50] gave the Petitioner [respondent herein] on October 10, 1997 an
function is to review errors of law.[26] The Court declines to Exhibits "C" to "C-1"[40] which are lists of concessionaires that 2. The assessment notices were addressed to Copper additional period of ten (10) days to present documentary
inquire into errors in the factual assessment of the CA, for the operated in Club John Hay in 1992, 1993 and 1991, Kettle Specialist, Club John Hay, Baguio City, despite evidence or a total of twenty (20) days, there was compliance
latter's findings are conclusive, especially when these are respectively,[41] it appears that there is no outlet with the name notice to petitioner that respondent's principal place with Revenue Regulations No. 12-85 and the latter was amply
synonymous to those of the CTA.[27] But when the CA "Copper Kettle Cafeteria Specialist" as claimed by respondent. of business was at the CCP Complex, Pasay City.[51] given opportunity to present his side x x x.[58]
contradicts the factual findings of the CTA, the Court deems it The name that appears in the lists is "19th TEE CAFETERIA 3. The assessment notices were issued in violation of the The CTA further held that respondent was estopped from
necessary to determine whether the CA was justified in doing (Copper Kettle, Inc.)." However, in the light of the express requirement of Revenue Regulations No. 12-85, raising procedural issues against the assessment notices,
so, for one basic rule in taxation is that the factual findings of admission of respondent that in 1991, 1992 and 1993, he dated November 27, 1985, that the taxpayer be because these were not cited in the September 28, 1997 letter-
the CTA, when supported by substantial evidence, will not be operated a branch called Copper Kettle Cafeteria Specialist in issued a post-reporting notice and pre-assessment protest which his spouse Jeanne Menguito filed with
disturbed on appeal unless it is shown that the CTA committed Club John Hay, the entries in Exhibits "A" through "C" could only notice before the preliminary findings of deficiency petitioner.[59]
gross error in its appreciation of facts.[28] mean that said branch refers to "19th Tee Cafeteria (Copper may ripen into a formal assessment;[52] and
Kettle, Inc.)." There is no evidence presented by respondent 4. The assessment notices did not give respondent a On appeal by respondent,[60] the CA resolved the issue, thus:
The Court finds that the CA gravely erred when it ignored the that contradicts this conclusion. 15-day period to reply to the findings of Moreover, if the taxpayer denies ever having received an
substantial evidence on record and reversed the CTA. deficiency.[53] assessment from the BIR, it is incumbent upon the latter to prove
In addition, the August 9, 1993 Certification issued by Club John The Court notes that nowhere in his Petition for Review did by competent evidence that such notice was indeed received
In a number of cases, the Court has shredded the veil of Hay that "COPPER KETTLE CATERING SERVICES owned and respondent deny that he received the September 2, 1997 by the addressee. Here, respondent [petitioner herein] merely
corporate identity and ruled that where a corporation is merely managed by MS. JEANNE G. MENGUITO is a concessionaire in assessment notices. Instead, during the trial, respondent's alleged that it "forwarded" the assessment notices to petitioner
an adjunct, business conduit or alter ego of another John Hay since July 1991 up to the present and is operating the witness, Ma. Theresa Nalda (Nalda), testified that she informed [respondent herein]. The respondent did not show any proof of
corporation or when they practice fraud on our internal outlet 19TH TEE CAFETERIA AND THE TEE BAR"[42] convincingly the BIR, Baguio City "that there was no Notice or letter, that we mailing, registry receipt or acknowledgment receipt signed by
revenue laws,[29] the fiction of their separate and distinct establishes that respondent's branch which he refers to as did not receive, perhaps, because they were not addressed to the petitioner [respondent herein]. Since respondent [petitioner
corporate identities shall be disregarded, and both entities Copper Kettle Cafeteria Specialist at Club John Hay also Mr. Menguito's head office."[54] herein] has not adduced sufficient evidence that petitioner
treated as one taxable person, subject to assessment for the appears in the latter's records as "Copper Kettle Catering [respondent herein] had in fact received the pre-assessment
same taxable transaction. Services" with an outlet called "19th Tee Cafeteria and The Tee The CTA correctly upheld the validity of the assessment notices. notice and post-reporting notice required by law, it cannot be
Bar." Citing Section 223 of the Tax Code which provides that the assumed that petitioner [respondent herein] had been served
The Court considers the presence of the following prescriptive period for the issuance of assessment notices said notices.[61]
No other ground was cited by the CA for the reversal of the assessment notice have been served on the taxpayer, [70]
finding of the CTA on the issue. applies only to formal assessments prescribed under Section
228 of the National Internal Revenue Code, but not to post-
The CA is gravely mistaken. reporting notices or pre-assessment notices. The issuance of a
valid formal assessment is a substantive prerequisite to tax
In their Petition for Review with the CTA, respondent expressly collection,[71] for it contains not only a computation of tax
stated that "[s]ometime in September 1997, petitioner liabilities but also a demand for payment within a prescribed
[respondent herein] received various assessment notices, all period, thereby signaling the time when penalties and interests
dated 02 September 1997, issued by BIR-Baguio for alleged begin to accrue against the taxpayer and enabling the latter
deficiency income and percentage taxes for taxable years to determine his remedies therefor. Due process requires that it
ending 31 December 1991, 1992 and 1993 x x x."[62] In their must be served on and received by the taxpayer.[72]
September 28, 1997 protest to the September 2, 1997
assessment notices, respondent, through his spouses Jeanne A post-reporting notice and pre-assessment notice do not bear
Menguito, acknowledged that "[they] are in receipt of the the gravity of a formal assessment notice. The post-reporting
assessment notice you have sent us, dated September 2, 1997 x notice and pre-assessment notice merely hint at the initial
x x."[63] findings of the BIR against a taxpayer and invites the latter to
an "informal" conference or clarificatory meeting. Neither
Respondent is therefore estopped from denying actual receipt notice contains a declaration of the tax liability of the taxpayer
of the September 2, 1997 assessment notices, notwithstanding or a demand for payment thereof. Hence, the lack of such
the denial of his witness Nalda. notices inflicts no prejudice on the taxpayer for as long as the
latter is properly served a formal assessment notice. In the case
As to the address indicated on the assessment notices, of respondent, a formal assessment notice was received by him
respondent cannot question the same for it is the said address as acknowledged in his Petition for Review and Joint
which appears in its percentage tax returns.[64] While Stipulation; and, on the basis thereof, he filed a protest with the
respondent claims that he had earlier notified petitioner of a BIR, Baguio City and eventually a petition with the CTA.
change in his business address, no evidence of such written
notice was presented. Under Section 11 of Revenue Regulation WHEREFORE, the petition is GRANTED. The March 31, 2005
No. 12-85, respondent's failure to give written notice of change Decision of the Court of Appeals is REVERSED and SET ASIDE and
of address bound him to whatever communications were sent the April 2, 2002 Decision and October 10, 2002 Resolution of
to the address appearing in the tax returns for the period the Court of Tax Appeals are REINSTATED.
involved in the investigation.[65]
Thus, what remain in question now are: whether petitioner
issued and mailed a post-reporting notice and a pre-
assessment notice; and whether respondent actually received

There is no doubt that petitioner failed to prove that it served

on respondent a post-reporting notice and a pre-assessment
notice. Exhibit "11"[66] of petitioner is a mere photocopy of a July
28, 1997 letter it sent to respondent, informing him of the initial
outcome of the investigation into his sales, and the release of a
preliminary assessment upon completion of the investigation,
with notice for the latter to file any objection within five days
from receipt of the letter. "Exhibit "13"[67] of petitioner is also a
mere photocopy of an August 11, 1997 Preliminary Ten (10) Day
Letter to respondent, informing him that he had been found to
be liable for deficiency income and percentage tax and
inviting him to submit a written objection to the proposed
assessment within 10 days from receipt of notice. But nowhere
on the face of said documents can be found evidence that
these were sent to and received by respondent. Nor is there
separate evidence, such as a registry receipt of the notices or
a certification from the Bureau of Posts, that petitioner actually
mailed said notices.

However, while the lack of a post-reporting notice and pre-

assessment notice is a deviation from the requirements under
Section 1[68] and Section 2[69] of Revenue Regulation No. 12-85,
the same cannot detract from the fact that formal assessments
were issued to and actually received by respondents in
accordance with Section 228 of the National Internal Revenue
Code which was in effect at the time of assessment.

It should be emphasized that the stringent requirement that an

assessment notice be satisfactorily proven to have been issued
and released or, if receipt thereof is denied, that said