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EN BANC

[G.R. No. L-10510. March 17, 1961.]

M. MCCONNEL, W.P. COCHRANE, RICARDO RODRIGUEZ, ET AL., Petitioners, v. THE COURT OF


APPEALS and DOMINGA DE LOS REYES, assisted by her husband, SABINO
PADILLA, Respondents.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; CORPORATIONS; WHEN INDIVIDUAL STOCKHOLDERS


ARE LIABLE FOR OBLIGATIONS CONTRACTED BY THE CORPORATION. — Whenever
circumstances have shown that the corporate entity is being use as an alter ego or
business conduit for the sole benefit of the stockholders, or else to defeat public
convenience, justify wrong, protect fraud, or defend crime, the individual stockholder
may be held liable for obligations contracted by the corporation. (Koppel [Phil. Inc. ]
v. Yatco, 77 Phil., 496; Arnold v. Willits and Patterson, 44 Phil., 364).

2. ACTIONS; JURISDICTION; SUIT IS ONE TO HAVE NON-PARTIES TO JUDGMENT HELD


RESPONSIBLE FOR ITS PAYMENT AND NOT AN ACTION TO ENFORCE JUDGMENT; COURT
HAS JURISDICTION. — Since the instant suit is not an action to enforce a judgment five
(5) years from its rendition, but an action to have non-parties to that judgment held
responsible for its payment, the Court had jurisdiction to try and decide the case.

DECISION
REYES, J.B.L., J.:

The issue before us is the correctness of the decision of the Court of Appeals that, under the
circumstances of record, there was justification for disregarding the corporate entity of the
Park Rite Co., Inc., and holding its controlling stockholders personally responsible for a
judgment against the corporation.

The Court of Appeals found that the Park Rite Co., Inc., a Philippine corporation, was
originally organized on or about April 15, 1947, with a capital stock of 1,500 shares at P1.00 a
share. The corporation leased from Rafael Perez Rosales y Samanillo a vacant lot on Juan
Luna street (Manila) which it used for parking motor vehicles for a consideration.

It turned out that in operating its parking business, the corporation occupied and used not
only the Samanillo lot it had leased but also an adjacent lot belonging to the respondents-
appellees Padilla, without the owners’ knowledge and consent. When the latter discovered

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the truth around October of 1947, they demanded payment for the use and occupation of
the lot.

The corporation (then controlled by petitioners Cirilo Paredes and Ursula Tolentino, who had
purchased and held 1,496 of its 1,500 shares) disclaimed liability, blaming the original
incorporators, McConnel, Rodriguez and Cochrane. Whereupon, the lot owners filed against
it a complaint for forcible entry in the Municipal Court of Manila on 7 October 1947 (Civ.
Case No. 4031).

Judgment was rendered in due course in 13 November 1947, ordering the Park Rite Co., Inc.,
to pay P7,410.00 plus legal interest as damages from April 15 to October 15, 1947, and
P1,235.00 a month from October 15, 1947 until return of the lot. Restitution not having been
made until 31 January 1948, the entire judgment amounted to P11,732.50. Upon execution,
the corporation was found without any assets other than P550.00 deposited in Court. After
their application to the judgment credit, there remained a balance of P11,182.50
outstanding and unsatisfied.

The judgment creditors then filed suit in the Court of First Instance of Manila against the
corporation and its past and present stockholders, to recover from them, jointly and
severally, the unsatisfied balance of the judgment, plus legal interest and costs. The Court of
First Instance denied recovery; but on appeal, the Court of Appeals (CA-G. R. No. 8434-R)
reversed, finding that the corporation was a mere alter ego or business conduit of the
principal stockholders that controlled it for their own benefit, and adjudged them responsible
for the amounts demanded by the lot owners, as follows:

"WHEREFORE premises considered the decision appealed from is reversed.


Defendants-appellees Cirilo Paredes and Ursula Tolentino are hereby declared
liable to the plaintiffs-appellants for the rentals due on the lot in question from
August 22, 1947 to January 31, 1948 at the rate of P1,235.00 a month with legal
interest thereon from the time of the filing of the complaint. Deducting the
P550.00 which was paid at the time when the corporation was already acquired
by said defendants-appellees Cirilo Paredes and Ursula Tolentino, they are
hereby ordered to pay to plaintiffs-appellants Dominga de los Reyes and Sabino
Padilla the sum of P6,036.66 with legal interest thereon from the time of the filing
of the complaint until fully paid.

Defendant-appellee Ricardo Rodriguez is hereby ordered to pay to the


plaintiffs-appellants Dominga de los Reyes and Sabino Padilla the sum of
P1,742.64 with legal interest thereon from the time of the filing of the complaint
and until it is fully paid. In addition thereto the defendants-appellees Cirilo
Paredes, Ursula Tolentino and Ricardo Rodriguez shall pay the costs
proportionately in both instances.

IT IS SO ORDERED."

Cirilo Paredes and Ursula Tolentino then resorted to this Court. We granted certiorari.

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On the main issue whether the individual stockholders may be held liable for obligations
contracted by the corporation, this Court has already answered the question in the
affirmative wherever circumstances have shown that the corporate entity is being used as
an alter ego or business conduit for the sole benefit of the stockholders, or else defeat public
convenience, justify wrong, protect fraud, or defend crime (Koppel [Phil. Inc. ] v. Yatco, 77
Phil., 496; Arnold v. Willits and Patterson, 44 Phil., 364).

The Court of Appeals has made express findings to the following effect:

"There is no question that a wrong has been committed by the so- called Park
Rite Co. Inc., upon the plaintiffs when it occupied the lot of the latter without its
prior knowledge and consent and without paying the reasonable rentals for the
occupation of said lot. There is also no doubt in our mind that the corporation
was a mere alter ego or business conduit of the defendants Cirilo Paredes and
Ursula Tolentino, and before them — the defendants M. McConnel, W. P.
Cochrane, and Ricardo Rodriguez. The evidence clearly shows that these
persons completely dominated and controlled the corporation and that the
functions of the corporation were solely for their benefits.

When it was originally organized on or about April 15, 1947, the original
incorporators were M. McConnel, W. P. Cochrane, Ricardo Rodriguez,
Benedicto M. Dario and Aurea Orfrecio with a capital stock of P1,500.00 divided
into 1,500 shares at P1.00 a share. McConnel and Cochrane each owned 500
shares, Ricardo Rodriguez 498 shares, and Dario and Orfrecio 1 share each. It is
obvious that the shares of the last two named persons were merely qualifying
shares. Then on or about August 22, 1947 the defendants Cirilo Paredes and
Ursula Tolentino purchased 1,496 shares of the said corporation and the
remaining four shares were acquired by Bienvenido J. Claudio, Quintin C.
Paredes, Segundo Tarictican, and Paulino Marquez at one share each. It is
obvious that the last four shares bought by these four persons were merely
qualifying shares and that to all intents and purposes the spouses Cirilo Paredes
and Ursula Tolentino composed the so-called Park Rite Co. Inc. That the
corporation was a mere extension of their personality is shown by the fact that
the offices of Cirilo Paredes and that of Park Rite Co., Inc., were located in the
same building, in the same floor and in the same room at 507 Wilson Building.
This is further shown by the fact that the funds of the corporation were kept by
Cirilo Paredes in his own name (p. 14, November 8, 1950, t.s.n.) . The corporation
itself had no visible assets, as correctly found by the trial court, except perhaps
the toll house, the wire fence around the lot and the signs thereon. It was for this
reason that the judgment against it could not be fully satisfied." (Emphasis
supplied).

The facts thus found cannot be varied by us, and conclusively show that the corporation is a
mere instrumentality of the individual stockholders, hence the latter must individually answer
for the corporate obligations. While the mere ownership of all or nearly all of the capital
stock of a corporation is a mere business conduit of the stock holders, that conclusion is

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amply justified where it is shown, as in the case before us, that the operations of the
corporation were so merged with those of the stockholders as to be practically
indistinguishable from them. To hold the latter liable for the corporation’s obligations is not to
ignore the corporation’s separate entity, but merely to apply the established principle that
such entity cannot be invoked or used for purposes that could not have been intended by
the law that created that separate personality.

The petitioners-appellants insist that the Court could have no jurisdiction over an action to
enforce a judgment within five (5) years from its rendition, since the Rules of Court provide for
enforcement by mere motion during those five years. The error of this stand is apparent,
because the second action, originally begun in the Court of First Instance, was not an action
to enforce the judgment of the Municipal Court, but an action to have non-parties to the
judgment held responsible for its payment.

Finding no error in the judgment appealed from, the same is hereby affirmed, with costs
against petitioners-appellants Cirilo Paredes and Ursula Tolentino.

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EN BANC
[G.R. No. L-17618. August 31, 1964.]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. NORTON HARRISON


COMPANY, Respondent.

SYLLABUS

1. CORPORATIONS; DOCTRINE OF PIERCING VEIL OF CORPORATE FICTION;


CIRCUMSTANCES OF CASE AT BAR. — The circumstances of the case at bar where: (a)
N. corporation owned all the outstanding stocks of J. corporation; (b) the board of
directors of N. corporation is constituted in such a way to enable it to actually direct
and manage the other corporations affairs by making the same officers of the board
for both companies; (c) N. corporation financed the operation of the other; (d) N
corporation treats the other’s employees as its own; (e) compensation given to board
members of J. corporation, who are also board members and/or employees of N
indicate that J is only a department: of N; and (f) the offices of both corporations are
located in the same compound; all lead to the conclusion that J corporation is merely
an adjunct, business conduit or alter ego of N corporation and that the action of
separate and distinct corporate entities should be disregarded.

2. TAXATION; CORPORATE FICTION MAY NOT BE USED TO EVADE TAXES. — The revenue
officers, in proper cases, may disregard the separate corporate entity where it serves
but as a shield for tax evasion.

DECISION
PAREDES, J.:

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

"IN VIEW OF THE FOREGOING, we find no legal basis to support the assessment in
question against petitioner. If at all, the assessment should have been directed
against JACKBILT, the manufacturer. Accordingly, the decision appealed from is
reversed, and the surety bond filed to guarantee payment of said assessment is
ordered cancelled. No pronouncement as to costs."

Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at wholesale and
retail, all kinds of goods, wares, and merchandise; (2) to act as agents of manufacturers in
the United States and foreign countries; and (3) to carry on and conduct a general
wholesale and retail mercantile establishment in the Philippines. Jackbilt is, likewise, a
corporation organized on February 16, 1948 primarily for the purpose of making, producing

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and manufacturing concrete blocks. Under date of July 27, 1948, Norton and Jackbilt
entered into an agreement whereby Norton was made the sole and exclusive distributor of
concrete blocks manufactured by Jackbilt. Pursuant to this agreement, whenever an order
for concrete blocks was received by the Norton & Harrison Co. from a customer, the order
was transmitted to Jackbilt which delivered the merchandise direct to the customer.
Payment for the good is, however, made to Norton, which in turn pays Jackbilt the amount
charged the customer less a certain amount, as its compensation or profit. To exemplify the
sales procedures adopted by the Norton and Jackbilt, the following may be cited. In the
case of the sale of 420 pieces of concrete blocks to the American Builders on April 1, 1952,
the purchaser paid to Norton the sum of P189.00 the purchase price. Out of this amount
Norton paid Jackbilt P168.00, the difference obviously being its compensation. As per
records of Jackbilt the transaction was considered a sale to Norton. It was under this
procedure that the sale of concrete blocks manufactured by Jackbilt was conducted until
May 1, 1953, when the agency agreement was terminated and a management agreement
between the parties was entered into. The management agreement provided that Norton
would sell concrete blocks for Jackbilt, for a fixed monthly management fee of P2,000.00,
which was later increased to P5,000.00.

During the existence of the distribution or agency agreement, or on June 10, 1949, Norton &
Harrison acquired by purchase all the outstanding shares of stock of Jackbilt. Apparently,
due to this transaction, the Commissioner of Internal Revenue, after conducting an
investigation, assessed the respondent Norton & Harrison for deficiency sales tax and
surcharges in the amount of P32,662.99, making as basis thereof the sales of Norton to the
public. In other words, the Commissioner considered the sale of Norton to the public as the
original sale and not the transaction from Jackbilt The period covered by the assessment
was from July 1, 1949 to May 31, 1953. As Norton and Harrison did not conform with the
assessment, the matter was brought to the Court of Tax Appeals.

The Commissioner of Internal Revenue contends that since Jackbilt was owned and
controlled by Norton & Harrison, the corporate personality of the former (Jackbilt) should be
disregarded for sales tax purposes, and the sale of Jackbilt blocks by petitioner to the public
must be considered as the original sales from which the sales tax should be computed. The
Norton & Harrison Company contended otherwise — that is, the transaction subject to tax is
the sale from Jackbilt to Norton.

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

"The law applicable to the case is Section 186 of the National Internal Revenue
Code which imposes a percentage tax of 7% on every original sale of goods,
wares or merchandise, such tax to be based on the gross selling price of such
goods, wares or merchandise. The term original sale has been defined as the
first sale by every manufacturer, producer or importer. (Sec, 5, Com. Act No.
503). Subsequent sales by persons other than the manufacturer, producer or
importer are not subject, to the sales tax.

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If JACKBILT actually sold, concrete blocks manufactured by it to petitioner under
the distributorship or agency agreement of July 27, 1948, such sales constituted
the original sales which are taxable under Section 186 of the Revenue Code,
while the sales made to the public by petitioner are subsequent sales which are
not taxable. But It appears to us that there was no such sale by JACKBILT to
petitioner. Petitioner merely acted as agent for JACKBILT in the marketing of its
products. This is shown by the fact that petitioner merely accepted orders from
the public for the purchase of JACKBILT blocks. The purchase orders were
transmitted to JACKBILT which delivered the blocks to the purchaser directly.
There, was no instance in which the blocks ordered by the purchasers were,
delivered to the petitioner. Petitioner never purchased concrete blocks from
JACKBILT so that it never acquired ownership of such concrete blocks. This being
so, petitioner could not have sold JACKBILT blocks for its own account. It did so
merely as agent of JACKBILT. The distributorship agreement of July 27, 1948, is
denominated by the parties themselves as an ‘agency for marketing’ JACKBILT
products . . .

x x x

Therefore, the taxable selling price of JACKBILT blocks under the aforesaid
agreement is the price charged to the public and not the amount billed by
JACKBILT to petitioner. The deficiency sales tax should have been assessed
against JACKBILT and not against petitioner which merely acted as the former’s
agent.

x x x

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

"Upon the aforestated circumstances, which disclose Norton’s control over and
direction of Jackbilt’s affairs, the corporate personality of Jackbilt should be
disregarded, and the transactions between these two corporations relative to
the concrete blocks should be ignored in determining the percentage tax for
which Norton is liable. Consequently, the percentage tax should be computed
on the basis of the sales of Jackbilt blocks to the public."

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

It has been settled that the ownership of all the stocks of a corporation by another
corporation does not necessarily breed an identity of a corporate interest between the
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

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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 the Jackbilt; of the 15,000 authorized shares of Jackbilt on March 31,
1958, 14,998 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 the Jackbilt corporation, the
only change being, in the Jackbilt, he is merely a nominal stockholder. The same is true with
M. Jordan, F. M. Domingo, M. Mantaring, Gilbert Golden and Gerardo Garcia, while they are
merely employees of the Norton, 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
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 show 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,
who are also board members and/or employees of Norton, 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 remunerations
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 P4,220.00 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 same 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

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there could be no confusion in the present set up of 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 channelled 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.

x x x

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 fiction."

". . . 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.

". . . 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.)

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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 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 would 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
advantage of Norton that the corporations should be regarded as separate entities.

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

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FIRST DIVISION

[G.R. No. 20214. March 17, 1923. ]

G. C. ARNOLD, Plaintiff-Appellant, v. WILLITS & PATTERSON, LTD., Defendant-Appellee.

SYLLABUS

1. CONSTRUCTION OF CONTRACT. — Where A entered into a written contract with the


firm of W & P by which he was employed as agent of the firms for a period of five
years, and dispute arose between them as to the compensation which A should
receive for his services, and A wrote a letter, known in the record as Exhibit B, which
clearly defined and specified the compensation which he was to receive, to which
one member of the firm gave his "conforme," A’s compensation for his services is
measured and controlled by Exhibit B.

2. WHEN CONTRACT WITH FIRM BINDS CORPORATION. — Where A entered upon the
discharge of his duties under a contract with the firm of W & P, and the firm organized
a corporation, which took over all of its assets and continued to conduct the business
of the firm as a corporation and which dealt with and treated A as its agent, in the
same manner as the firm had previously done, the corporation is bound by the
contract which the firm made with A.

3. WHEN CONTRACT BY INDIVIDUAL BINDS CORPORATION. — Where a contract is made


with A by W in his own name, and W is the owner of all of the capital stock of the
corporation, and the corporation deals with A as its agent under the contract, the
contract which W made with A becomes a contract between A and the corporation,
and the corporation is bound by the contract.

4. IN THE ABSENCE OF FRAUD "CREDITORS’ COMMITTEE" OF INSOLVENT CORPORATION


CANNOT RESCIND CONTRACT OF CORPORATION. — Where a corporation becomes
insolvent, and its affairs were placed in the hands of a "creditors’ committee," the
"committee," is bound by any valid contract made between A and the corporation,
and, in the absence of fraud, the "creditors’ committee" has no power to rescind the
contract.

DECISION

STATEMENT

For a number of years prior to the times alleged in the complaint, the plaintiff was in the
employ of the International Banking Corporation of Manila, and it is conceded that he is a

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competent and experienced business man July 31, 1916, C. D. Willits and I. L. Patterson were
partners doing business in San Francisco, California, under the name of Willits & Patterson.
The plaintiff was then in San Francisco, and as a result of negotiations the plaintiff and the firm
entered into a written contract, known in the record as Exhibit A, by which the plaintiff was
employed as the agent of the firm in the Philippine Islands for certain purposes for the period
of five years at a minimum salary of $200 per month and travelling expenses. The plaintiff
returned to Manila and entered on the discharge of his duties under the contract. As a result
of plaintiff’s employment and word war conditions, the business of the firm in the Philippines
very rapidly increased and grew beyond the fondest hopes of either party. A dispute arose
between the plaintiff and the firm as to the construction of Exhibit A as to the amount which
plaintiff should receive for his services. Meanwhile Patterson retired from the firm and Willits
became the sole owner of its assets. For convenience of operation and to serve his own
purpose, Willits organized a corporation under the laws of California with its principal office at
San Francisco, in and by which he subscribed for, and became the exclusive owner of, all
the capital stock, except a few shares for organization purposes only, and the name of the
firm was used as the name of the corporation. A short time after that Willits came of Manila
and organized a corporation here known as Willits & Patterson, Ltd., in and to which he again
subscribed for all of the capital stock except the nominal shares necessary to qualify the
directors. In legal effect, the San Francisco corporation took over and acquired all of the
assets and liabilities of the Manila corporation. At the time that Willits was in Manila and while
to all intents and purposes he was sole owner of the stock of corporations, there was a
conference between him and the plaintiff over the disputed construction of Exhibit A. As a
result of which another instrument, known in the record as Exhibit B, was prepared in the form
of a letter which the plaintiff addressed to Willits at Manila on November 10, 1919, the
purpose of which was to more clearly define and specify the compensation which the
plaintiff was to receive for his services. Willits received and confirmed this letter by signing the
name of Willits & Patterson, By C. D. Willits. At that time both corporations were legally
organized, and there is nothing in the corporate minutes to show that Exhibit B was ever
formally ratified or approved by either corporation. After its organization, the Manila
corporation employed a regular accountant whose duty it was to audit the accounts of the
company and render financial statements both for the use of the local banks and the local
and parent corporations at San Francisco. From time to time and in the ordinary course of
business such statement of account were prepared by the accountant and duly forwarded
to the home office, and among other things was a statement of July 31, 1921, showing that
there was due and owing the plaintiff under Exhibit B the sum of P106,277.50. A short time
previous to that date, the San Francisco corporation became involved in financial trouble,
and all of its assets were turned over to a "creditors’ committee." When this statement was
received, the "creditors’ committee" immediately protested its allowance. An attempt was
made without success to adjust the matter on a friendly basis and without litigation. January
10, 1922, the plaintiff brought this action to recover from the defendant the sum of
P106,277.50 with legal interest and costs, and the written instruments known in the record as
Exhibits A and B were attached to, and made a part of, the complaint.

For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit
A and denies each and every other allegation, except as specifically admitted, and alleges
that what is known as Exhibits B was signed by Willits without the authority of the defendant

12
corporation or the firm of Willits & Patterson, and that it is not an agreement which was ever
entered into with the plaintiff by the defendant or the firm, and, as a separate defense and
counterclaim, it alleges that on the 30th of Jun, 1920, there was a balance due and owing
the plaintiff from the defendant under the contract Exhibit A of the sum of P 8,741.05 That his
salary from June 30, 1920, to July 31, 1921, under Exhibit A was $400 per month, or a total of
P10,400. That about July 6, 1921, the plaintiff wrong fully took P30,000 from the assets of he
firm, and that he is now indebted to the firm in the sum of P10,858.95, with interest and costs,
from which it prays judgment.

The plaintiff admits that he withdrew the P30,00, but alleges that it was with the consent and
authority of the defendant, and denies all other new matter in the answer.

Upon such issues a trial was had, and the lower court rendered judgment in favor of the
defendant, as prayed for in its counterclaim, from which the plaintiff appeals, contending
that the trial court erred in not holding that the contract between the parties is that which is
embodied in Exhibits A and B, and that the defendant assumed all partnership obligations,
and in failing to render judgment for the plaintiff, as prayed form and in dismissing his
complaint, and denying plaintiff’s motion for a new trial.

JOHNS, J. :

In their respective briefs opposing counsel agree that the important questions involved are
"what was the contract under which the plaintiff rendered services for five years ending July
31, 1921," and what is due the plaintiff under that contract." Plaintiff contends that his
services were performed under Exhibit A and B, and that the defendant assumed all of the
obligations of the original partnership under Exhibit A, and is now seeking to deny its liability
under, and repudiate, Exhibit B. The defendant admits that Exhibit A was the original
contract between Arnold and the firm of Willits & Patterson by which he came to the
Philippine Islands, and that it was therein agreed that he was to be employed for a period of
five years as the agent of Willits & Patterson in the Philippine Islands to operate a certain oil
mill, and to do such other business as might be deemed advisable, for which he was to
receive, first, the traveling expenses of his wife and self from San Francisco to Manila, second,
the minimum salary of $200 per month, third, a brokerage of 1 per cent upon all purchases
and sales of merchandise, except for the account of the coconut oil mill, fourth, one-half of
the profits on any transaction in the name of the firm or himself not provided for in the
agreement. That the agreement also provided that if it be found that the business was
operated at a loss, Arnold should receive a monthly salary of $400 during such period. That
the business was operated at a loss from June 30, 1920, to July 31, 1921, and that for such
reason, he was entitled to nothing more than a salary of $400 per month, or for that period
P10,400. Adding this amount to the P8,741.05, which the defendant admits he owed Arnold
on June 30, 1920, Makes a total of P19,141.05, leaving a balance due the defendant as set
out in the counterclaim. In other words, that the plaintiff’s compensation was measured by,
and limited to, the above specified provisions in the contract Exhibit A, and that the
defendant corporation is not bound by the terms or provisions of Exhibit B, which is as follows:

13
WILLIT & PATTERSON, LTD.
MANILA, P. I., Nov. 10, 1919.
CHAS. D. WILLITS, Esq.,
Present.

DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits &
Patterson is as under:

Commissions. Willits & Patterson, San Francisco, pay me a


commission of one per cent on all purchases made for them in the
Philippines or sales made to them by Manila and one per cent on all
sales made for them in the Philippines, or purchases made from
them by Manila. If such purchases or sales are on an f. o. b. basis
the commission is on the f. o. b. price; if on a c. i. f. basis the
commission is computed on the c. i. f. price.

These commissions are credited to me in San Francisco.

I do not participate in any profits on business transacted between Willits &


Patterson, San Francisco, and Willits & Patterson, Ltd., Manila.

Profits. On all business transacted between Willits & Patterson, Ltd. and others
than Willits & Patterson, San Francisco, half the profits are to be credited to my
account and half to the Profit & Loss account of Willits & Patterson, Ltd., Manila.

On all other business, such as the Cooperative Coconut Products Co. account,
or any other business we may under take s agents or managers, half the profits
are to be credited to my account and half to the Profit & Loss account of Willits
& Patterson, Ltd., Manila.

Where Willits & Patterson, San Francisco, or Willits & Patterson. Ltd., Manila, have
their own funds invested in the capital stock or a corporation, I of course do not
participate in the earnings of such stock, any more than Willits & Patterson would
participate in the earning of stock held by me on my own account.

If the foregoing conforms to your understanding of our agreement, please


confirm below.

Yours faithfully,

(Sgd.) G. C. ARNOLD

Confirmed:

WILLITS & PATTERSON

14
By (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C. D. Willits and I. L.
Patterson constituted the firm of Willits & Patterson doing business in the City of San Francisco;
that later Patterson retired from the firm, and Willits acquired all of his interests and thereafter
continued the business under the name and style of Willits & Patterson; that the original
contract Exhibit A was made between the plaintiff and the old firm at San Francisco on July
31, 1916, to cover a period of five years from that date; that plaintiff entered upon the
discharge of his duties and continued his services in the Philippine Islands to someone for the
period of five years; that on November 10, 1919, and as a result of conferences between
Willits and the plaintiff, Exhibit B was addressed and signed in the manner and form above
stated in the City of Manila. A short time prior to that date Willits organized a corporation in
San Francisco, in the State of California, which took over and acquired all of the assets of the
firm’s business in California then being conducted under the name and style of Willits &
Patterson; that he subscribed for all of the capital stock of the corporation, and that in truth
and in fact he was the owner of all of its capital stock. After this was done he caused a new
corporation to be organized under the laws of the Philippine Islands with principal office at
Manila, which took over and acquired all the business and assets of the firm of Willits &
Patterson in the Philippine Islands, in and to which, in legal effect, he subscribed for all of its
capital stock, and was the owner of all of its stock. After both corporations were organized
the above letter was drafted and signed. The plaintiff contends that the signing of Exhibit B in
the manner and under the conditions in which it was signed, and through the subsequent
acts and conduct of the parties, was ratified, and, in legal effect, became and is now
binding upon the defendant.

It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by
Willits, he was to all intents and purposes the legal owner of all the stock in both corporations.
It also appears from the evidence that the parent corporation at San Francisco took over
and acquired all of the assets and liabilities of the local corporation at Manila. That after it
was organized the Manila corporation kept separate records and accounts books of its own,
and that from time to time financial statements were made and forwarded to the home
office, from which it conclusively appears that plaintiff was basing his claim for services upon
Exhibit A, as it was modified by Exhibit B. That at no time after Exhibit B was signed was there
ever any dispute between plaintiff and Willits as to the compensation for plaintiff’s services.
That is to say, as between the plaintiff and Willits, Exhibit B was approved, followed and at all
times in force and effect, after it was signed November 10, 1919. It appears from an analysis
of Exhibit B that it was for the mutual interests of both parties. From a small beginning, the
business was then in a very flourishing condition and growing fast, and the profits were very
large and were running into big money.

Among other things, Exhibit A provided:" (a) That the net profits from said coconut oil
business shall be divided in equal shares between the said parties hereto; (b) that Arnold
should receive a brokerage of 1 per cent from all purchases and sales of merchandise,
except for the account of the coconut mills; (c) that the net profits from all other business
should be divided in equal half shares between the parties hereto."

15
Under the above provisions, the plaintiff might well contend that he was entitled to one-half
of all the profits and a brokerage of 1 per cent from all purchases and sales, except those for
the account of the coconut oil mills, which under the volume of business then existing would
run into a very large sum of money. It was for such reason and after personal conferences
between them, and to settle all disputed questions, that Exhibit B was prepared and signed.

The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the
plaintiff faithfully performed all the duties incumbent upon him under his contract of
employment, it being understood, however, that this admission does not include an
admission that the plaintiff placed a proper interpretation upon his right to remuneration
under said contract of employment."

It being admitted that the plaintiff worked "under hi contract of employment" for the period
of five years, the question naturally arises, for whom was he working? His contract was made
with the original firm of Willits & Patterson, and that firm was dissolved and it ceased to exist,
and all of its assets were merged in, and taken over by, the parent corporation at San
Francisco. In the very nature of things, after the corporation was formed, the plaintiff could
not and did not continue to work for the firm, and, yet, he continued his employment for the
full period of five years. For whom did he work after the partnership was merged in the
corporation and ceased to exist?

It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the
mutual interests of both parties, and that if the contract Exhibit A was to be enforced
according to its terms, that Arnold might well contend for a much larger sum of money for his
services. In truth and in fact Willits and both corporations recognized and accepted his
services. Although the plaintiff was president of the local corporation, the testimony is
conclusive that both of them were what is known as a one man corporation, and Willits, as
the owner of all of the stock, was the force and dominant power which controlled them.
After Exhibit B was signed it was recognized by Willits that the plaintiff’s services were to be
performed and measured by its terms and provisions, and there never was any dispute
between plaintiff and Willits upon that question.

The controversy first arose after the corporation was in financial trouble and the
appointment of what is known in the record as a "creditors’ committee." There is no claim or
pretense that there was any fraud or collusion between plaintiff and Willits, and it is very
apparent that Exhibit B was to the mutual interests of both parties. It is elementary law that if
Exhibit B is a binding contract between the plaintiff and Willits and the corporations, it is
equally binding upon the creditors’ committee. It would not have any higher or better legal
right than the corporation itself, and could not make any defense which it could not make. It
is very significant that the claim or defense which is now interposed by the creditors’
committee was never made or asserted at any previous time by the defendant, and that it
never was made by Willits, and it is very apparent that if he had remained in control of the
corporation, it would never have made the defense which is now made by the creditor’
committee. The record is conclusive that at that at the time he signed Exhibit B, Willits was, in
legal effect, the owner and holder of all the stock in both corporations, and that he
approved it in their interest, and to protect them from the plaintiff having and making a

16
much larger claim under Exhibit A. As a matter of fact, it appears from the statement of Mr.
Larkin, the accountant, in the record that if plaintiff’s cause of action was now founded
upon Exhibit A, he would have a claim for more than P160,000.

Thompson on Corporations; 2d ed., vol. I, section 10, says:jgc:

The proposition that a corporation has an existence separate and distinct from
its membership has its limitations. It must be noted that this separate existence is
for particular purposes. It must also be remembered that there can be no
corporate existence without persons to compose it; there can be no association
without associates. This separate existence is to a certain extent a legal fiction.
Whenever necessary for the interests of the public or for the protection or
enforcement of the rights of the membership, courts will disregard this legal
fiction and operate upon both the corporation and the persons composing it.

In the same section, the author quotes from a decision in 49 Ohio State, 137 1; 15 L. R. A., 145,
in which the Supreme Court of Ohio says:

So long as a proper use is made of the fiction that a corporation is an entity


apart from it shareholders, it is harmless, and, because convenient, should not
be called in question; but where it is urged to an end subversive of its policy, or
such is the issue, the fiction must be ignored, and the question determined
whether the act in question, though done by shareholders, — that is to say, by
the persons uniting in one body, — was done simply as shareholders, or was
done ostensibly as such, but, as a matter of fact, to control the corporation, and
affect the transaction of its business, in the same manner as if the act had been
clothed with all the formalities of a corporate act. This must be so, because, the
stockholders having a dual capacity, and capable of acting in either, and a
possible interest to conceal their character when acting in their corporate
capacity, the absence of the formal evidence of the character of the act
cannot preclude judicial inquiry on the subject. If it were otherwise, then in that
department of the law fraud would enjoy an immunity awarded to it in no other.

Where the stock of a corporation is owned by one person whereby the


corporation functions only for the benefit of such individual owner, the
corporation and the individual should be deemed to be the same." (U. S.
Gypsum Co. v. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:

While of course a corporation cannot ratify a contract which is strictly ultra vires,
and which it in the first instance could not have made, it may it may by
ratification render binding on it a contract, entered into on its behalf by its
officers or agents without authority. As a general rule such ratification need not
be manifested by any vote or formal resolution of the corporation or be
authenticated by the corporate seal; no higher degree of evidence is requisite

17
in establishing ratification on the part of a corporation, than is requisite in
showing an antecedent authorization.
x x x

"SEC. 666. The assent or approval of a corporation to acts done on its account
may be inferred in the same manner that the assent of a natural person may be,
and it is well settled that where a corporation with full knowledge of the
unauthorized act of its officers or agents acquiesces in and consents to such
acts, it thereby ratifies them, especially where the acquiescence results in
prejudice to a third person.

x x x

SEC. 669. So, when, in the usual course of business of a corporation, an officer
has been allowed in his official capacity to manage its affairs, his authority to
represent the corporation may be inferred from the manner in which he has
been permitted by the directors to transact its business."

SEC. 656. In accordance with a well-known rule of the law of agency, notice to
corporate officers or agents within the scope or apparent scope of their
authority is attributed to the corporation.

x x x

SEC. 667. As a general rule, if a corporation with knowledge of its agent’s


unauthorized act receives and enjoys the benefits thereof, it impliedly ratifies the
unauthorized act if it is one capable of ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:

Ratification by a corporation of a transaction not previously authorized is more


easily inferred where the corporation receives and retains property under it, and
as a general rule where a corporation, through its proper officers or board, takes
and retains the benefits of the unauthorized act or contract of an officer or
agent, with full knowledge of all the material facts, it thereby ratifies and
becomes bound by such act or contract together with all the liabilities and
burdens resulting therefrom, and in some jurisdictions this rule is, in effect,
declared by statute. Thus the corporation is liable on the ground of ratification
where with knowledge of the facts, it accepts the benefit of services rendered
under an unauthorized contract of employment . . .

Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation, and from
time to time and in the ordinary course of business made and prepared financial statements
showing its assets and liabilities, true copies of which were sent to the home office in San
Francisco. It appears upon their face that plaintiff’s compensation was made and founded

18
on Exhibit B, and that such statements were made and prepared by the accountant on the
assumption that Exhibit B was in full force and effect as between the plaintiff and the
defendant. In the course of business in the early part of 1920, plaintiff, as manager of the
defendant, sold 500 tons of oil for future delivery at P740 per ton. Due to a break in the
market, plaintiff was able to purchase the oil at P380 per ton or a profit of P180.000.

It appears from Exhibit B under the heading of "Profits" that:

On all business transacted between Willits & Patterson, Ltd. and others than
Willits & Patterson, San Francisco, half the profits are to be credited to my
account and half to the Profit & Loss account of Willits & Patterson Ltd., Manila.

The purchase paid P105,000 on the contract and gave their notes for P75,000, and it was
agreed that all of the oil purchased should be held as security for the full payment of the
purchase price. As a result, the defendant itself received the P105,000 in cash, P75,000 in
notes, and still holds the 500 tons of oil as security for the balance of the purchase price. This
transaction was shown in the semi-annual financial statement for the period ending
December 31, 1920. That is to say, the business was transacted by and through the plaintiff,
and the defendant received and accepted all of the profits on the deal, and the statement
which was rendered gave him a credit for P90,737.88, or half the profit as profit as provided
in the contract Exhibit B, with interest.

Although the previous financial statements show upon their face that the account of plaintiff
was credited with several small items on the same basis, it was not until the 23d of March,
1921, that any objection was ever made by anyone, and objection was made for the first
time by the creditors’ committee in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now
binding upon the defendant corporation, and the plaintiff is entitled to recover for his
services on that writing as it modified the original contract Exhibit A.

It appears from the statement prepared by accountant Larkin founded upon Exhibit B that
the plaintiff is entitled to recover P106,277.50. It is very apparent that his statement was
based upon the assumption that there was a net profit of P180,000 on the 500 tons of oil, of
which the plaintiff was entitled to one-half.

In the absence of any other proof, we have the right to assume that the 500 tons of oil was
worth the amount which the defendant paid for them at the time of the purchase or P380
per ton, and the record shows that the defendant took and now has the possession of all of
the oil to secure the payment of the price at which it was sold. Hence, the profit on the deal
to the defendant at the time of the sale would amount to the difference between what the
defendant paid for the oil and the amount which it received for the oil at the time it sold the
oil. It appears that at the time of the sale the defendant only received P105,000 in cash, and
that it took and accepted the promissory notes of Cruz & Tan Chong Say, the purchasers, for
P75,000 more which have not been collected and may never be. Hence, it must follow that

19
the amount evidenced by the notes cannot now be deemed or treated as profits on the
deal and cannot be until such time as the notes are paid.

The judgment of the lower court is reversed, and a money judgment will be entered here in
favor of the plaintiff and against the defendant for the sum of P68,527.50, with interest
thereon at the rate of 6 per cent annum from the 10th day of January, 1922. In addition
thereto, judgment will be rendered against the defendant in substance and to the effect
that the plaintiff is the owner of an undivided one-half interest in the promissory notes for
P75,000, which were executed by Cruz & Tan Chong Say, as a part of the purchase price of
the oil, and that he is entitled to have and receive one-half of all the proceeds from the
notes or either of them, and that also he have judgment against the defendant for costs. So
ordered

20
EN BANC
[G.R. No. L-5677. May 25, 1953.]

LA CAMPANA COFFEE FACTORY, INC., and TAN TONG, doing business under the trade name
"LA CAMPANA GAUGAU PACKING", Petitioners, v. KAISAHAN NG MGA MANGGAGAWA SA
LA CAMPANA (KKM) and THE COURT OF INDUSTRIAL RELATIONS, Respondents.

SYLLABUS

1. INDUSTRIAL DISPUTES; TWO FACTORIES OPERATING UNDER ONE MANAGEMENT; EFFECT OF


ONE OF THEM BEING A REGISTERED CORPORATION. — C Coffee Factory, Inc., and C
Gaugau Packing are operating as one business though with two trade names. The owner
of the latter is T; and the former, though an incorporated business, is in reality owned
exclusively by T and his family. The two factories had but one office, one management
and one payroll until July 17, the day the case was certified to the Court of Industrial
Relations, when the person who was discharging the office of cashier for both branches
of the business began preparing separate payrolls for the two. And the laborers of the
gaugau factory and the coffee factory were interchangeable, that is, the laborers from
the gaugau factory were sometimes transferred to the coffee factory and vice-versa.
Held: The attempt to make the two factories appear as two separate businesses, when in
reality they are but one, is but a device to defeat the ends of the law (the Act governing
capital and labor relations) and should not be permitted to prevail. Although the coffee
factory is a corporation and, by legal fiction, an entity existing separate and apart from
the persons composing it, that is, T and his family, it is settled that this fiction of law, which
has been introduced as a matter of convenience and to subserve the ends of justice
cannot be invoked to further an end subversive of that purpose. (13 Am. Jur., 160-162;
Annotation 1 A. L. R. 612, s. 34 A. L. R. 599.)
2. ID.; JURISDICTIONAL NUMBER OF LABORERS REQUIRED FOR A LABOR TO SUE IN THEIR
BEHALF. — Although the coffee factory has only 14 laborers and only five of these are
members of the labor union, yet as the gaugau factory has more than the jurisdiction
number (31) required by law and the two factories are operating under one single
management, the industrial court has jurisdiction to try the case as against C Coffee
Factory, Inc.
3. ID.; JURISDICTION ONCE ACQUIRED IS NOT LOST EVEN IF PERMIT OF LABOR UNION IS
SUSPENDED. — Once the Court of Industrial Relations has duly acquired jurisdiction over a
case, such jurisdiction is not lost even after the Department of Labor has suspended the
permit of the petitioning labor union.

DECISION
REYES, J.:
Tan Tong, one of the herein petitioners, has since 1932 been engaged in the business of
buying and selling gaugau under the trade name La Campana Gaugau Packing with an

21
establishment in Binondo, Manila, which was later transferred to España Extension, Quezon
City. But on July 6, 1950, Tan Tong, with himself and members of his family as sole
incorporators and stockholders, organized a family corporation known as La Campana
Coffee Factory Co., Inc., with its principal office located in the same place as that of La
Campana Gaugau Packing.

About a year before the formation of the corporation, or on July 11, 1949, Tan Tong had
entered into a collective bargaining agreement with the Philippine Legion of Organized
Workers, known as PLOW for short, to which the union of Tan Tong’s employees headed by
Manuel E. Sadde was then affiliated. Seceding, however, from the PLOW, Tan Tong’s
employees later formed their own organization known as Kaisahan Ng Mga Manggagawa
Sa La Campana, one of the herein respondents, and applied for registration in the
Department of Labor as an independent entity. Pending consideration of this application,
the Department gave the new organization legal standing by issuing it a permit as an
affiliate to the Kalipunan Ng Mga Kaisahang Manggagawa.

On July 19, 1951, the Kaisahan Ng Mga Manggagawa Sa La Campana, hereinafter to be


referred to as the respondent Kaisahan, which, as of that date, counted with 66 members —
workers all of them of both La Campana Gaugau Packing and La Campana Coffee Factory
Co., Inc. — presented a demand for higher wages and more privileges, the demand being
addressed to La Campana Starch and Coffee Factory, by which name they sought to
designate, so it appears, the La Campana Gaugau Packing and the La Campana Coffee
Factory Co., Inc. As the demand was not granted and an attempt at settlement through the
mediation of the Conciliation Service of the Department of Labor had given no result, the
said Department certified the dispute to the Court of Industrial Relations on July 17, 1951, the
case being there docketed as Case No. 584-V.

With the case already pending in the industrial court, the Secretary of Labor, on September
5, 1951, revoked the Kalipunan Ng Mga Kaisahang Manggagawa’s permit as a labor union
on the strength of information received that it was dominated by subversive elements, and,
in consequence, on the 20th of the same month, also suspended the permit of its affiliate,
the respondent Kaisahan.

We have it from the court’s order of January 15, 1952 which forms one of the annexes to the
present petition, that following the revocation of the Kaisahan’s permit, "La Campana
Gaugau and Coffee Factory" (obviously the combined name of La Campana Gaugau
Packing and La Campana Coffee Factory Co., Inc.) and the PLOW, which had been
allowed to intervene as a party having an interest in the dispute, filed separate motions for
the dismissal of the case on the following grounds:
1. That the action is directed against two different entities with distinct
personalities, with "La Campana Starch Factory" and the "La Campana
Coffee Factory, Inc.;
2. That the workers of the "La Campana Coffee Factory, Inc." are less than
thirty-one;

22
3. That the petitioning union has no legal capacity to sue, because its
registration as an organized union has been revoked by the Department of
Labor on September 5, 1951, and
4. there is an existing valid contract between the respondent "La Campana
Gaugau Packing" and the intervenor PLOW, wherein the petitioner’s
members are contracting parties bound by said contract.

Several hearings were held on the above motions, in the course of which ocular inspections
were also made, and on the basis of the evidence received and the facts observed in the
ocular inspections, the Court of Industrial Relations denied the said motions in its order of
January 14, 1952, because it found as a fact that:

A. While the coffee corporation is a family corporation with Mr. Tan Tong, his
wife, and children as the incorporators and stockholders (Exhibit 1), the La
Campana Gaugau Packing is merely a business name (Exhibit 4).
B. According to the contract of lease (Exhibit 23), Mr. Tan Tong, proprietor and
manager of the La Campana Gaugau Factory, leased a space of 200
square meters in the bodega housing the gaugau factory to his son Tan Keng
Lim, manager of the La Campana Coffee Factory. But the lease was
executed only on September 1, 1951, while the dispute between the parties
was pending before the Court.
C. There is only one entity La Campana Starch and Coffee Factory, as shown by
the signboard (Exhibit 1), the advertisement in the delivery trucks (Exhibit I-1),
the packages of gaugau (Exhibit K), and delivery forms (Exhibits J, J-1, and J-
2).
D. All the laborers working in the gaugau or in the coffee factory receive their
pay from the same person, the cashier, Miss Natividad Garcia, secretary of
Mr. Tan Tong; and they are transferred from the gaugau to the coffee and
vice-versa as the management so requires.
E. There has been only one payroll for the entire La Campana personnel and
only one person preparing the same — Miss Natividad Garcia, secretary of
Mr. Tan Tong. But after the case at bar was certified to this Court on July 17,
1951, the company began making separate payrolls for the coffee factory
(Exhibits M-2 and M-3, and for the gaugau factory (Exhibits O-2, O-3, and O-
4). It is to be noted that before July 21, 1951, the coffee payrolls all began
with number "41-Maria Villanueva" with 24 or more laborers (Exhibits M and M-
1), whereas beginning July 21, 1951, the payrolls for the coffee factory began
with No. 1-Loreta Bernabe with only 14 laborers (Exhibits M-2 and M-3).
F. During the ocular inspection made in the factory on August 26, 1951, the
Court has found the following:

‘In the ground floor and second floor of the gau-gau factory there
were hundreds of bags of raw coffee behind the pile of gaugau
sacks. There were also women employees working paper wrappers
for gaugau, and, in the same place there were about 3,000 cans to
be used as containers for coffee.

23
‘The Court found out also that there were 16 trucks used both for
the delivery of coffee and gaugau. To show that those trucks
carried both coffee and gaugau, the union president invited the
Court to examine the contents of delivery truck No. T-582 parked in
a garage between the gaugau building and the coffee factory,
and upon examination, there were found inside the said truck
boxes of gaugau and cans of coffee,’

and held that:

". . . there is only one management for the business of gau-gau and coffee with
whom the laborers are dealing regarding their work. Hence, the filing of action
against the La Campana Starch and Coffee Factory is proper and justified.

With regards to the alleged lack of personality, it is to be noted that before the
certification of the case to this Court on July 17, 1951, the petitioner Kaisahan ng
Mga Manggagawa sa La Campana, had a separate permit from the
Department of Labor. This permit was suspended on September 30, 1951. (Exhibit
M-Intervenor, page 55, of the record). It is not true that, on July 17, 1951, when
this case was forwarded to this Court, the petitioner’s permit, as an independent
union, had not yet been issued, for the very Exhibit MM-Intervenor regarding the
permit, conclusively shows the preexistence of said permit." (Annex G.)

Their motion for reconsideration of the above order having been denied, Tan Tong and La
Campana Coffee Factory, Inc. (same as La Campana Coffee Factory Co., Inc.) , later
joined by the PLOW, filed the present petition for certiorari on the grounds that the Court of
Industrial Relations had no jurisdiction to take cognizance of the case, for the reason,
according to them," (1) that the petitioner La Campana Coffee Factory, Inc. has only 14
employees, only 5 of whom are members of the respondent union and therefore the
absence of the jurisdictional number (30) as provided by sections 1 and 4 of Commonwealth
Act No. 103; and, (2) that the suspension of respondent union’s permit by the Secretary of
Labor has the effect of taking away the union’s right to collective bargaining under section 2
of Commonwealth Act No. 213 and, consequently, its personality to sue for and in behalf of
its members."

As to the first ground, petitioners obviously do not question the fact that the number of
employees of the La Campana Gaugau Packing involved in the case is more than the
jurisdictional number (31) required by law, but they do contend that the industrial court has
no jurisdiction to try the case as against La Campana Coffee Factory, Inc. because the latter
has allegedly only 14 laborers and only five of these are members of the respondent
Kaisahan. This contention loses force when it is noted that, as found by the industrial court —
and this finding is conclusive upon us — La Campana Gaugau Packing and La Campana
Coffee Factory Co. Inc., are operating under one single management, that is, as one
business though with two trade names. True, the coffee factory is a corporation and, by
legal fiction, an entity existing separate and apart from the persons composing it, that is, Tan

24
Tong and his family. But it is settled that this fiction of law, which has been introduced as a
matter of convenience and to subserve the ends of justice cannot be invoked to further an
end subversive of that purpose.

"Disregarding Corporate Entity. — The doctrine that a corporation is a legal entity existing
separate and apart from the persons composing it is a legal theory introduced for purposes
of convenience and to subserve the ends of justice. The concept cannot, therefore, be
extended to a point beyond its reason and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the courts. Thus, in an appropriate case and
in furtherance of the ends of justice, a corporation and the individual or individuals owning
all its stocks and assets will be treated as identical, the corporate entity being disregarded
where used as a cloak or cover for fraud or illegality. (13 Am. Jur., 160-161.)

". . . A subsidiary or auxiliary corporation which is created by a parent corporation merely as


an agency for the latter may sometimes be regarded as identical with the parent
corporation, especially if the stockholders or officers of the two corporations are substantially
the same or their system of operation unified." (Ibid. 162; see Annotation 1 A. L. R. 612, s. 34 A.
L. R. 599.)

In the present case Tan Tong appears to be the owner of the gaugau factory. And the
coffee factory, though an incorporated business, is in reality owned exclusively by Tan Tong
and his family. As found by the Court of Industrial Relations, the two factories have but one
office, one management and one payroll, except after July 17, the day the case was
certified to the Court of Industrial Relations, when the person who was discharging the office
of cashier for both branches of the business began preparing separate payrolls for the two.
And above all, it should not be overlooked that, as also found by the industrial court, the
laborers of the gaugau factory and the coffee factory were interchangeable, that is, the
laborers from the gaugau factory were sometimes transferred to the coffee factory and
vice-versa. In view of all these, the attempt to make the two factories appear as two
separate businesses, when in reality they are but one, is but a device to defeat the ends of
the law (the Act governing capital and labor relations) and should not be permitted to
prevail.

The second point raised by petitioner is likewise without merit. In the first place, there being
more than 30 laborers involved and the Secretary of Labor having certified the dispute to
the Court of Industrial Relations, that court duly acquired jurisdiction over the case
(International Oil Factory v. NLU, Inc. 73 Phil., 401; section 4, C. A. 108). This jurisdiction was not
lost when the Department of Labor suspended the permit of the respondent Kaisahan as a
Labor organization. For once jurisdiction is acquired by the Court of Industrial Relations it is
retained until the case is completely decided. (Manila Hotel Employees Association v. Manila
Hotel Co. Et. Al., 73 Phil., 374.)

In view of the foregoing, the petition is denied, with costs against the petitioner.

25
EN BANC
[G.R. No. L-13203. January 28, 1961.]

YUTIVO SONS HARDWARE COMPANY, Petitioner, v. COURT OF TAX APPEALS and COLLECTOR
OF INTERNAL REVENUE, Respondents.

SYLLABUS

1. CORPORATIONS; SEPARATE AND DISTINCT PERSONALITY; WHEN CORPORATE PERSONALITY IS


DISREGARDED. — Although a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be connected, 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. (Koppel [Phil. ], Inc. v. Yatco, 77 Phil., 496,
citing I Fletcher Cyclopedia of Corporation, Perm. Ed., pp. 135-136; United States v.
Milwaukee Refrigeration Transit Co., 142 Fed., 247; 255 per Sanborn, J.)
2. TAXATION; INTENTION TO MINIMIZE TAXES; DEGREE OF PROOF REQUIRED TO ESTABLISH
FRAUD. — 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.
3. ID.; ID.; MEANING OF "TAX EVASION." — "Tax evasion" is a term that connotes fraud
through the use of pretenses and forbidden devices to lessen or defeat taxes.
4. ID.; ID.; RIGHT OF TAXPAYER TO DECREASE TAX DUE BY LEGAL MEANS. — A taxpayer has
the legal right to decrease the amount of what otherwise would be his taxes or
altogether avoid them by means which the law permits. (U.S. v. Isham. 17 Wall. 496, 596;
Gregory v. Helvering, 293 U.S. 469; Comm. v. Tower, 327 U.S. 280; Lawton v. Comm. 194 F
[2] 380).
5. ID.; ID.; MERE UNDERSTATEMENT OF TAX NO PROOF OF FRAUD. — Mere understatement of
tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed 90 F [2] 978, cited
in Merten’s Sec. 55.11 p. 21.)
6. ID.; ID.; TAXPAYER ESTOPPED TO REPUDIATE CERTAIN WAIVERS OF STATUTE OF LIMITATIONS.
— Estoppel has been employed to prevent the application of the statute of limitations
against the government in certain instances in which the taxpayer has taken some
affirmative action to prevent the collection of the tax within the statutory period. It is
generally held that a taxpayer is estopped to repudiate waivers of the statute of
limitations upon which the government relied. (Mertens Law of Federal Income Taxation,
Vol. 10-A, pp. 159-160.)
7. ASSESSMENT AND REFUNDS OF TAXES; REVIEW OF THE DECISION OF THE COLLECTOR OF
INTERNAL REVENUE. — The procedure prescribed in sections 8 and 9 of Executive Order
No. 401-A, Series of 1951, is intended as a check or control upon the powers of the

26
Collector of Internal Revenue with respect to assessments and refunds of taxes. If a
decision of the Collector on partial remission of taxes is subject to review by the Secretary
of Finance and the Board of Tax Appeals, then with more reason should his power to
withdraw totally an assessment be subject to such review.
8. ID.; SALES TAXES; SCOPE OF TERMS "GROSS SELLING PRICE" AND "GROSS VALUE IN MONEY."
— Section 184-186 of the Tax Code impose a tax on original sales measured by "gross
selling price" or "gross value in money." These terms do not include the amount of the sales
tax, if invoiced separately.

DECISION

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to
pay to respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax
deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75%
surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of
the suit.

From the stipulation of facts and the evidence adduced by both parties, it appears that
petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic
corporation, organized under the laws of the Philippines, with principal office at 404
Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in
the importation and sale of hardware supplies and equipment. After the liberation, it
resumed its business and until June of 1946 bought a number of cars and trucks from General
Motors Overseas Corporation (hereafter referred to as GM for short), an American
corporation licensed to do business in the Philippines. As importer, GM paid sales tax
prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to
Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax
on its sales to the public.

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

At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed
in 5 equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington
Sycip. The first three named subscribers are brothers, being sons of Yu Tiong Yee, one of
Yutivo’s founders. The latter two are respectively sons of Yu Tiong Sin and Albino Sycip, who
are among the founders of Yutivo.

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

27
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and
Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the
same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as
importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales
tax, as already stated, is collected only once on original sales, SM paid no sales tax on its
sales to the public.

On November 7, 1950, 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 18, 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 detailed
as follows:

Deficiency 75% Total Sales Tax Surcharge Amount Due Assessment (First) of
November 7, 1950 for deficiency sales Tax for the period from 3rd Qrtr. 1947 to
4th Qrtr. 1949 inclusive
P1,031,296.60 P773,473.45 P1,804,769.05
Additional Assessment for period from 1st to 4th Qrtr. 1950, inclusive
P234,880.13 P176,160.09 P411,040.22
Total amount demanded per letter of December 16, 1954
P1,266,176.73 P949,632.54 P2,215,809.27
=========== =========== ===========

This second assessment was contested by the petitioner Yutivo before the Court of Tax
Appeals, alleging 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

28
personality of SM may be disregarded, the sales tax already paid by Yutivo should first he
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 on April 27, 1957,
rendered the decision now complained of. Of the two Judges who signed the decision, one
voted for the modification of the computation of the sales tax as determined by the
respondent Collector in his decision so as to give allowance for the reduction of the tax
already paid (resulting in the reduction of the assessment to P820,509.91 exclusive of
surcharges), while the other voted for affirmance. The dispositive part of the decision,
however, affirmed the assessment made by the Collector. Reconsideration of this decision
having been denied, Yutivo brought the case to this Court thru the present petition for
review.

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 corporations 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. (Koppel [Phil. ], Inc. v. Yatco, 77 Phil., 496, citing I Fletcher Cyclopedia of Corporation,
Perm. Ed., pp. 135-136; United States v. Milwaukee Refrigeration Transit Co., 142 Fed., 247; 255
per Sanborn, J.) Another rule is that, when the corporation is the "mere alter ego or business
conduit of a person, it may be disregarded." (Koppel [Phil. ], Inc. v. Yatco, supra.)

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 nor 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.

Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was
known that GM was preparing to leave the Philippines and terminate its business of importing
vehicles," the court below speculated that Yutivo anticipated the withdrawal of GM from
business in the Philippines in June, 1947. This observation, which was made only in the
resolution on the motion for reconsideration, however, finds no basis in the record. On the
other hand, GM had been an importer of cars in the Philippines even before the war and

29
had but recently resumed its operation in the Philippines in 1946 under an ambitious plan to
expand its operation by establishing an assembly plant here, so that it could not have been
expected to make so drastic a turnabout of not merely abandoning the assembly plant
project but also totally ceasing to do business as an importer. Moreover the newspaper
clipping Exh. "T", was published on March 24, 1947, and merely reported a rumored plan that
GM would abandon the assembly plant project in the Philippines. There was no mention of
the cessation of business by GM which must not be confused with the abandonment of the
assembly plant project. Even as respect the assembly plant, the newspaper clipping was
quite explicit in saying that the Acting Manager refused to confirm the rumor as late as
March 24, 1947, almost a year after SM was organized.

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. (Vitelli & Sons v. U.S., 250 U.S. 355; Duffin v.
Lucas, 55 F [2d] 786; Budd v. Commr., 43 F [2d] 509; Maryland Casualty Co. v. Palmette Coal
Co., 40 F [2d] 374; Schoonfield Bros., Inc. v. Commr., 38 BTA 943; Charles Heiss v. Commr., 36
BTA 833; Kerbaugh v. Commr., 74 F [2d] 749; Maddas v. Commr., 114 F [2d] 548; Moore v.
Commr., 37 BTA 378; National City Bank of New York v. Commr., 98 F [2d] 93; Richard v.
Commr., l5 BTA 316; Rea Gano v. Commr., 19 BTA 518.) (See also Balter, Fraud Under Federal
Law, pp. 301-302, citing numerous authorities; Arroyo v. Granada, Et Al., 18 Phil., 484.) Fraud is
never imputed and the courts never sustain findings of fraud upon circumstances which, at
the most, create only suspicion. (Haygood Lumber & Mining Co. v. Commr., 178 F [2d] 769;
Dalone v. Commr., 100 F [2d] 507).

In the second place, SM was organized and it operated, under circumstance that belied
any intention to evade sales taxes. "Tax evasion" is a term that connotes fraud thru the use of
pretenses and forbidden devices to lessen or defeat taxes. The transactions between Yutivo
and SM, however, have always been in the open, embodied in private and public
documents, constantly subject to inspection by the tax authorities. As a matter of fact, after
Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it merely
continued the method of distribution that it had initiated long before GM withdrew from the
Philippines.

On the other hand, if tax saving was the only justification for the organization of SM, such
justification certainly ceased with the passage of Republic Act No. 594 on February 16, 1951,
governing payment of advance sales tax by the importer based on the landed cost of the
imported article, increased by mark-ups of 25%, 50% and 100%, depending on whether the
imported article is taxed under sections 186, 185 and 184, respectively, of the Tax Code.
Under Republic Act No. 594, the amount at which the article is sold is immaterial to the
amount of the sales tax. And yet after the passage of that Act, SM continued to exist up to
the present and operates as it did many years past in the promotion and pursuit of the
business purposes for which it was organized.

In the third place, sections 184 to 186 of the said Code provide that the sales tax shall be
collected "once only on every original sale, barter, exchange . . ., to be paid by the

30
manufacturer, producer or importer." The use of the word "original" and the express provision
that the tax was collectible "once only" evidently has made the provisions susceptible of
different interpretations. In this connection, it should be stated that a taxpayer has the legal
right to decrease the amount of what otherwise would be his taxes or altogether avoid them
by means which the law permits. (U.S. v. Isham. 17 Wall. 496, 596; Gregory v. Helvering, 293
U.S. 465, 469; Commr. v. Tower, 327 U.S. 280; Lawton v. Commr. 194 F [2d] 380). Any legal
means used by the tax payer to reduce taxes are all right (Benny v. Commr. 25 T. Cl. 78). A
man may, therefore, perform an act that he honestly believes to be sufficient to exempt him
from taxes. He does not incur fraud thereby even if the act is thereafter found to be
insufficient. Thus in the case of Court Holding Co. v. Commr., 2 T. Cl. 531, it was held that
though an incorrect position in law had been taken by the corporation there was no
suppression of the facts, and a fraud penalty was not justified.

The evidence for the Collector, in our opinion, falls short of the standard of clear and
convincing proof of fraud. As a matter of fact, the respondent Collector himself showed a
great deal of doubt or hesitancy as to the existence of fraud. He even doubted the validity
of his first assessment dated November 7, 1950. It must be remembered that the fraud which
respondent Collector imputed to Yutivo must be related to its filing of sales tax returns for less
taxes than were legally due. The allegation of fraud, however, cannot be sustained without
the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for
therein were less than what were legally due. Considering that respondent Collector himself
with the aid of his legal staff, and after some two years of investigation and study concluded
in 1952 that Yutivo’s sales tax returns were correct — only to reverse himself after another two
years — it would seem harsh and unfair for him to say in 1954 that Yutivo fully knew in
October 1947 that its sales tax returns were inaccurate.

On this point, one other consideration would show that the intent to save taxes could not
have existed in the minds of the organizers of SM. The sales tax imposed, in theory and in
practice, is passed on to the vendee, and is usually billed separately as such in the sales
invoice. As pointed out by petitioner Yutivo, had not SM handled the retail, the additional tax
that would have been payable by it, could have been easily passed off to the consumer,
especially since the period covered by the assessment was a "seller’s market" due to the
post-war scarcity up to late 1948, and the imposition of controls in late 1949.

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

31
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 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 Albino 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 each 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
persons, 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 effected by the mere unilateral act of Yutivo. Yutivo, by
virtue of its control over the individual accounts of the 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.

32
True, petitioner and other recorded stockholders transferred their shareholdings, but the
transfers were made to their immediate relatives, either to their respective spouses and
children or sometimes brothers or sisters. Yutivo’s shares in SM were transferred to immediate
relatives of persons who constituted its controlling stockholders, directors and officers.
Despite these purported changes in stock ownership in both corporations, the Board of
Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, Yu
Khe Siong, Yu Khe Jin and Yu Eng Poh (all of the Yu or Young family) continued to constitute
the majority in both boards. All these, as observed by the Court of Tax Appeals, merely serve
to corroborate the fact that there was a common ownership and interest in the two
corporations.

SM is under the management and control of Yutivo by virtue of a management contract


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

Another aspect relative to Yutivo’s control over SM operations relates to its cash transactions.
All cash assets of SM were handled by Yutivo and all cash transactions of SM were actually
maintained thru Yutivo. Any and all receipts of cash by SM including its branches were
transmitted or transferred immediately and directly to Yutivo in Manila upon receipt thereof.
Likewise, all expenses, purchases or other obligations incurred by SM are referred to Yutivo
which in turn prepares the corresponding disbursement vouchers and payments in relation
thereto, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the
absence thereof which occurs generally, a corresponding charge is made against the
account of SM in Yutivo’s books. The payments for and charges against SM are made by
Yutivo as a matter of course and without need of any further request, the latter would
advanced all such cash requirements for the benefit of SM. Any and all payments and cash
vouchers are made on Yutivo stationery and made under authority of Yutivo’s corporate
officers, without any copy thereof being furnished to SM. All detailed records such as cash
disbursements, such as expenses, purchases, etc. for the account of SM, are kept by Yutivo
and SM merely keeps a summary record thereof on the basis of information received from
Yutivo.

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

Consideration of various other circumstances, especially when taken together, indicates that
Yutivo treated SM merely as its department or adjunct. For one thing, the accounting system
maintained by Yutivo shows that it maintained a high degree of control over SM accounts.
All transactions between Yutivo and SM are recorded and effected by mere debit or credit

33
entries against the reciprocal account maintained in their respective books of accounts and
indicate the dependency of SM as branch upon Yutivo.

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

The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact
that arrastre charges paid for the "operation of receiving, conveying, and loading or
unloading" of imported cars and trucks on piers and wharves, were charged against SM.
Overtime charges for the unloading of cars and trucks as requested by Yutivo and incurred
as part of its acquisition cost thereof, were likewise charged against and treated as expenses
of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo’s
expenses in importing goods and not SM’s. But since those charges were made against SM, it
plainly appears that Yutivo has sole authority to allocate its expenses even as against SM in
the sense that the latter is a mere adjunct, branch or department of the former.

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

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

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

Petitioner contends that the respondent Collector had lost his right or authority to issue the
disputed assessment by reason of prescription. The contention, in our opinion, cannot be

34
sustained. It will be noted that the first assessment was made on November 7, 1950 for
deficiency sales tax from 1947 to 1949. The corresponding returns filed by petitioner covering
the said period was made at the earliest on October 1 as regards the third quarter of 1947,
so that it cannot be claimed that the assessment was not made within the five-year period
prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is
admitted, was withdrawn by the Collector on November 15, 1952 due to insufficiency of
evidence, but the withdrawal was made subject to the approval of the Secretary of Finance
and the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No.
401-A, series of 1951. The decision of the previous Collector counter-manding the assessment
of November 7, 1950 was forwarded to the Board of Tax Appeals through the Secretary of
Finance but that official, apparently disagreeing with the decision, sent it back for re-
investigation. Consequently, the assessment of November 7, 1950 cannot be considered to
have been finally withdrawn. That the assessment was subsequently reiterated in the
decision of respondent Collector on December 16, 1954 did not alter the fact that it was
made seasonably. In this connection, it would appear that a warrant of distraint and levy
has been issued on March 28, 1951 in relation with this case and by virtue thereof the
properties of Yutivo were placed under constructive distraint. Said warrant and constructive
distraint have not been lifted up to the present, which shows that the assessment of
November 7, 1950 has always been valid and subsisting.

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

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

It should here also be stated that the assessment in question was consistently protested by
petitioner, making several requests for reinvestigation thereof. Under the circumstances,
petitioner may be considered to have waived the defense of prescription.
"Estoppel has been employed to prevent the application of the statute of limitations against
the government in certain instances in which the taxpayer has taken some affirmative action
to prevent the collection of the tax within the statutory period. It is generally held that a
taxpayer is estopped to repudiate waivers of the statute of limitations upon which the
government relied. The cases frequently involve dissolved corporations. If no waiver has
been given, the cases usually show some conduct directed to a postponement of
collection, such, for example, as some variety of request to apply an over assessment. The
taxpayer has ‘benefited’ and ‘is not in a position to contest’ his tax liability. A definite
representation of implied authority may be involved, and in many cases the taxpayer has

35
received the ‘benefit’ of being saved from the inconvenience, if not hardship of immediate
collection.

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

It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 — requiring the
approval of the Secretary of Finance and the Board of Tax Appeals in cases involving an
original assessment of more than P5,000 - refers only to compromises and refunds of taxes,
but not to total withdrawal of the assessment. The contention is without merit. A careful
examination of the provisions of both sections 8 and 9 of Executive Order No. 401-A, series of
1951, reveals the procedure prescribed therein is intended as a check or control upon the
powers of the Collector of Internal Revenue in respect to assessment and refunds of taxes. If
it be conceded that a decision of the Collector of Internal Revenue on partial remission of
taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals, then
with more reason should the power of the Collector to withdraw totally an assessment be
subject to such review.

We find merit, however, in petitioner’s contention that the Court of Tax Appeals erred in the
imposition of the 50% fraud surcharge. As already shown in the early part of this decision, no
element of fraud is present.

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

The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 T.C.
531, 541-549) is in point. The petitioner Court Holding Co. was a corporation consisting of only
two stockholders, to wit: Minnie Miller and her husband Louis Miller. The only assets of this
husband and wife corporation consisted of an apartment building which had been
acquired for a very low price at a judicial sale. Louis Miller, the husband who directed the
company’s business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine,
husband and wife, for the sum of $54,000.00, payable in various installments. He received
$1,000.00 as down payment. The sale of this property for the price mentioned would have
netted the corporation a handsome profit on which a large corporate income tax would
have to be paid. On the afternoon of February 23, 1940, when the Millers and the Fines got
together for the execution of the document of sale, the Millers announced that their
attorney had called their attention to the large corporate tax which would have to be paid
if the sale was made by the corporation itself. So instead of proceeding with the sale as
planned, the Millers approved a resolution to declare a dividend to themselves "payable in
the assets of the corporation, in complete liquidation and surrender of all the outstanding
corporate stock." The building, which as above stated was the only property of the
corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine

36
for exactly the same price and under the same terms as had been previously agreed upon
between the corporation and the Fines.

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

The U.S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than
to avoid the tax and was, in substance, a sale by the Court Holding Co., and that, therefore,
the said corporation should be liable for the assessed taxable profit thereon. The Court of Tax
Appeals also sustained the Commissioner of Internal Revenue on the delinquency penalty of
25%. However, the Court of Tax Appeals disapproved the fraud penalties, holding that an
attempt to void a tax does not necessarily establish fraud; that it is a settled principles that a
taxpayer may diminish his tax liability by means which the law permits; that if the petitioner,
the Court Holding Co., was of the opinion that the method by which it attempted to effect
the sale in question was legally sufficient to avoid the imposition of a tax upon it, its adoption
of that method is not subject to censure; and that in taking a position with respect to a
question of law, the substance of which was disclosed by the statement indorsed on its
return, it may not be said that position was taken fraudulently. We quote in full the pertinent
portion of the decision of the Court of Tax Appeals:

". . . The respondent’s answer alleges that the petitioner’s failure to report as
income the taxable profit on the real estate sale was fraudulent and with intent
to evade the tax. The petitioner filed a reply denying fraud and averring that the
loss reported on its return was correct to the best of its knowledge and belief.
We think the respondent has not sustained the burden of proving a fraudulent
intent. We have concluded that the sale of the petitioner’s property was in
substance a sale by the petitioner, and that the liquidating dividend to
stockholders had no purpose other than that of tax avoidance. But the attempt
to avoid tax does not necessarily establish fraud. It is a settled principle that a
tax payer may diminish his liability by any means which the law permits. United
States v. Isham, 17 Wall. 496; Gregory v. Helvering, supra; Chisholm v.
Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the
method by which it attempted to effect the sale in question was legally
sufficient to avoid the imposition of tax upon it, its adoption of that method is not
subject to censure. Petitioner took a position with respect to a question of law,
the substance of which was disclosed by the statement endorsed on its return.
We can not say, under the record before us, that position was taken
fraudulently. The determination of the fraud penalties is reversed."

37
When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax
was paid only once and on the original sales by the former and neither the latter nor SM
paid taxes on their subsequent sales. Yutivo might have, therefore, honestly believed that
the payment by it, as importer, of the sales tax was enough as in the case of GM.
Consequently, in filing its return on the basis of its sales to SM and not on those by the latter to
the public, it cannot be said that Yutivo deliberately made a false return for the purpose of
defrauding the government of its revenues which will justify the imposition of the surcharge
penalty.

We likewise find meritorious the contention that the Tax Court erred in computing the
alleged deficiency sales tax on the selling price of SM without previously deducting
therefrom the sales tax due thereon. The sales tax provisions (secs. 184-186, Tax Code)
impose a tax on original sales measured by "gross selling price" or "gross value in money."
These terms, as interpreted by the respondent Collector, do not include the amount of the
sales tax, if invoiced separately. Thus General Circular No. 431 of the Bureau of Internal
Revenue dated July 29, 1939, which implements sections 184-186 of the Tax Code provides:

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

General Circular No. 440 of the same Bureau reads:

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

Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales
taxes did not form part of the "gross selling price" as the measure of the tax. Since Yutivo has
previously billed the sales tax separately in its sales invoices to SM. General Circulars Nos. 431
and 440 should be deemed to have been complied with. Respondent Collector’s method of
computation, as opined by Judge Nable in the decision complained of—

38
". . . is unfair, because . . . (it is) practically imposing a tax on a tax already paid.
Besides, the adoption of the procedure would in certain cases elevate the
bracket under which the tax is based. The late payment is already penalized,
thru the imposition of surcharges; by adopting the theory of the Collector, we
will be creating an additional penalty not contemplated by law."

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

Gross Sales Sales Taxes Due Total Gross


Rates of Vehicles and Computed Selling Price of Sales Exclusive of under Gen.
Cir. Charged to Tax Sales Tax Nos. 431 & 400 the Public
5% P11,912,219.57 P595,610.98 P12,507,830.55
7% 909,559.50 63,669.16 973,228.66
10% 2,618,695.28 261,896.53 2,880,564.81
15% 3,602,397.65 540,359.65 4,142,757.30
20% 267,150.50 53,430.10 320,580.60
30% 837,146.97 251,144.09 1,088,291.06
50% 74,244.30 37,122.16 111,366.46
75% 8,000.00 6,000.00 14,000.00
—————— —————— ——————
TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44
Less Taxes Paid by Yutivo 988,655.76
Deficiency tax still due P820,549.91

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

Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its
jurisdiction in promulgating judgment for the affirmance of the decision of respondent
Collector by less than the statutory requirement of at least two votes of its judges. Anent this
contention, section 2 of Republic Act No. 1125, creating the Court of Tax Appeals, provides
that "Any two judges of the Court of Tax Appeals shall constitute a quorum, and the
concurrence of two judges shall be necessary to promulgate any decision thereof. . . . ." It is
on record that the present case was heard by two judges of the lower court. And while
Judge Nable expressed his opinion on the issue of whether or not the amount of the sales tax
should be excluded from the gross selling price in computing the deficiency sales tax due
from the petitioner, the opinion, apparently, is merely an expression of his general or "private
sentiment" on the particular issue, for he concurred in the dispositive part of the decision. At
any rate, assuming that there is no valid decision for lack or concurrence of two judges, the
case was submitted for decision to the court below on March 28, 1957 and under section 13
of Republic Act 1125, cases brought before said court shall be decided within 30 days after
submission thereof. "If no decision is rendered by the Court within thirty days from the date a
case is submitted for decision, the party adversely affected by said ruling, order or decision

39
may file with said Court a notice of his intention to appeal to the Supreme Court, and if no
decision has as yet been rendered by the Court, the aggrieved party may file directly with
the Supreme Court an appeal from said ruling, order or decision, notwithstanding the
foregoing provisions of this section." The case having been brought before us on appeal, the
question raised by petitioner has become purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby
modified in that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus
25% surcharge thereon for late payment. So ordered without costs.

40
EN BANC
[G.R. No. L-9687. June 30, 1961.]

LIDDELL & CO., INC., Petitioner-Appellant, v. THE COLLECTOR OF INTERNAL


REVENUE, Respondent-Appellee.

SYLLABUS

1. JUDGES; DISQUALIFICATION; PARTICIPATION IN PRIOR PROCEEDINGS AS ADMINISTRATIVE


OFFICIAL. — The mere participation of a judge in prior proceeding relating to the subject
in the capacity of an administrative official does not disqualify him from acting as judge.
2. COURT OF TAX APPEALS; DECISION SIGNED AFTER 30 DAYS FROM SUBMISSION OF CASE,
VALID. — The requirement that cases brought before the Tax Court shall be decided
within 30 days after the submission thereof for decision is merely directory. Hence,
decisions signed after the lapse of said period are valid.
3. CORPORATION LAW; WHEN CORPORATE FORM MAY BE IGNORED. — Where a corporation
is a dummy and serves no business purpose and is intended only as a blind, the corporate
form may be ignored.
4. TAXATION; SALES TAX; WHEN TAXPAYER MAY NOT DENY TAX LIABILITY. — A taxpayer may
not 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 corporation.
5. ID.; ID.; SURCHARGE WHEN NOT IMPOSABLE. — Where, as in the case at bar, the sales
made by the taxpayer to the corporation had been embodied in proper documents
subject to inspection by the tax authorities, the return filed on the basis of such sales and
not on those to the public, cannot be said a false return and subject the taxpayer to a
surcharge. But penalty for late payment should be imposed.
6. ID.; ID.; DEFICIENCY SALES TAX, HOW COMPUTED. — Deficiency sales tax should be based
on the selling price to the public after deducting the tax paid on the original sales.

DECISION

BENGZON, C.J. :

Statement. This is an appeal from the decision of the Court of Tax Appeals imposing a tax
deficiency liability of P1,317,629.61 on Liddell & Co., Inc.

Said company lists down several issues which may be boiled to the following:
(a) Whether or not Judge Umali of the Tax Court below could validly participate
in the making of the decision;
(b) Whether or not Liddell & Co. Inc., and the Liddell Motors Inc. are (practically)
identical corporations, the latter being merely the alter ego of the former;

41
(c) Whether or not, granting the identical nature of the corporations, the
assessment of tax liability, including the surcharge thereon, by the Court of
Tax Appeals, is correct.

Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving the right
to present additional evidence.

Said undisputed facts are substantially as follows:

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic corporation
established in the Philippines on February 1, 1946, with an authorized capital of P100,000
divided into 1000 shares at P100 each. Of this authorized capital, 196 shares valued at
P19,600 were subscribed and paid by Frank Liddell while the other four shares were in the
name of Charles Kurz, E. J. Darras, Angel Manzano and Julian Serrano at one share each. Its
purpose was to engage in the business of importing and retailing Oldsmobile and Chevrolet
passenger cars and GMC and Chevrolet trucks.

On January 31, 1947, with the limited paid-in capital of P20,000, Liddell & Co. was able to
declare a 90% stock dividend after which declaration, Frank Liddell’s holdings in the
company increased to 1,960 shares and the employees, Charles Kurz, E.J. Darras, Angel
Manzano and Julian Serrano at 10 shares each. The declaration of stock dividend was
followed by a resolution increasing the authorized capital of the company to P1,000,000
which the Securities & Exchange Commission approved on March 3, 1947. Upon such
approval, Frank Liddell subscribed to 3,000 additional shares, for which he paid into the
corporation P300,000 so that he had in his own name 4,960 shares.

On May 24, 1947, Frank Liddell, on one hand and Messrs. Kurz, Darras, Manzano and Serrano
on the other, executed an agreement (Exhibit A) which was further supplemented by two
other agreements (Exhibits B and C) dated May 24, 1947 and June 3, 1948, wherein Frank
Liddell transferred (On June 7, 1948) to various employees of Liddell & Co. shares of stock.

At the annual meeting of stockholders of Liddell & Co. held on March 9, 1948, a 100% stock
dividend was declared, thereby increasing the issued capital stock of said corporation to
P1,000,000. The stockholders also approved a resolution increasing the authorized capital
stock from P1,000,000 to P3,000,000 which increase was duly approved by the Securities and
Exchange Commission on June 7, 1948. Frank Liddell subscribed to and paid 20% of the
increase of P400,000. He paid 25% thereof in the amount of P100,000 and the balance of
P300,000 was merely debited to Frank Liddell-Drawing Account and credited to Subscribed
Capital Stock on December 31, 1948.

On March 8, 1949, stock dividends were again issued by Liddell & Co. and in accordance
with the agreements, Exhibits A, B, and C, the stocks of said company stood as follows:

Name No. of Shares Amount Percent


Frank Liddell 13,688 P1,368,800 72.00%
Irene Liddell 1 100 .01%

42
Mercedes Vecin 1 100 .01%
Charles Kurz 1,225 122,500 6.45%
E J. Darras 1,225 122,500 6.45%
Angel Manzano 1,150 115,000 6.06%
Julian Serrano 710 71,000 3.74%
E. Hasim 500 50,000 2.64%
G. W. Kernot 500 50,000 2.64%
——— ————— ————
19,000 P1,900,000 100.00%
===== ========= =======

On November 15, 1948, in accordance with a resolution of a special meeting of the Board of
Directors of Liddell & Co. stock dividends were again declared. As a result or said
declaration and in accordance with the agreements, Exhibits, A, B, and C, the stockholdings
in the company appeared to be:

Name No. of Shares Amount Percent

Frank Liddell 19,738 P1,973,800 65.791%

Irene Liddell 1 100 .003%

Mercedes Vecin 1 100 .003%

Charles Kurz 2,215 221,500 7.381%

E.J. Darras 2,215 221,500 7.381%

Angel Manzano 1,810 181,000 6.031%

Julian Serrano 1,700 170,000 5.670%

E. Hasim 830 83,000 2.770%

Kernot 1,490 149,000 4.970%


—— ——— ———
30,000 P3,000,000 100.00%
===== ======== ======

On the basis of the agreement Exhibit A, (May, 1947) 55% of the earnings available for
dividends accrued to Frank Liddell although at the time of the execution of said instrument,
Frank Liddell owned all of the shares in said corporation. 45% accrued to the employees,
parties thereto: Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2% and Julian Serrano 7-1/2%.
The agreement Exhibit A was also made retroactive to 1946. Frank Liddell reserved the right
to reapportion the 45% dividends pertaining to the employees in the future for the purpose of
including such other faithful and efficient employees as he may subsequently designate. (As

43
a matter of fact, Frank Liddell did so designate, two additional employees namely: E. Hasim
and G. W. Kernot). It was for such inclusion of future faithful employees that Exhibits B-1 and
C were executed. As per Exhibit C, dated May 13, 1948, the 45% given by Frank Liddell to his
employees was reapportioned as follows: C. Kurz — 12 %; E. J. Darras — 12%; A. Manzano —
12%; J. Serrano — 3-1/2%; G. W. Kernot — 2%.

Exhibit B contains the employees’ definition in detail of the manner by which they sought to
prevent their shareholdings from being transferred to others who may be complete strangers
to the business of Liddell & Co.

From 1946 until November 22, 1948 when the purpose clause of the Articles of Incorporation
of Liddell & Co. Inc., was amended so as to limit its business activities to importations of
automobiles and trucks, Liddell & Co. was engaged in business as an importer and at the
same time retailer of Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet
trucks.

On December 20, 1948, the Liddell Motors, Inc. was organized and registered with the
Securities and Exchange Commission with an authorized capital stock of P100,000 of which
P20,000 was subscribed and paid for as follows: Irene Liddell, wife of Frank Liddell, 19,996
shares and Messrs, Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1
share each.

At about the end of the year 1948, Messrs. Manzano, Kurz and Kernot resigned from their
respective positions in the Retail Dept. of Liddell & Co. and they were taken in and
employed by Liddell Motors, Inc., Kurz as Manager-Treasurer, Manzano as General Sales
Manager for cars and Kernot as General Sales Manager for trucks.

Beginning January, 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them
instead to Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-
up. Since then, Liddell & Co. paid sales taxes on the basis of its sales to Liddell Motors, Inc.
considering said sales as its original sales.

Upon review of the transactions between Liddell & Co. and Liddell Motors Inc., the Collector
of Internal Revenue determined that the latter was but an alter ego of Liddell & Co.
Wherefore, he concluded, that for sales tax purposes, those sales made by Liddell Motors,
Inc. to the public were considered as the original sales of Liddell & Co. Accordingly, the
Collector of Internal Revenue assessed against Liddell & Co. a sales tax deficiency, including
surcharges, in the amount of P1,317,629.61. In the computation, the gross selling price of
Liddell Motors, Inc. to the general public from January 1, 1949 to September 15, 1950, was
made the basis without deducting from the selling price, the taxes already paid by Liddell &
Co. in its sales to the Liddell Motors, Inc.

The Court of Tax Appeals upheld the position taken by the Collector of Internal Revenue.

A. Judge Umali: Appellant urges the disqualification of Judge Roman M. Umali to participate
in the decision of the instant case because he was Chief of the Law Division, then Acting

44
Deputy Collector and later Chief Counsel of the Bureau of Internal Revenue during the
time when the assessment in question was made. 1 In refusing to disqualify himself despite
admission that he had held the aforementioned offices, Judge Umali stated that he had
not in any way participated, nor expressed any definite opinion, on any question raised
by the parties when this case was presented for resolution before the said bureau.
Furthermore, after careful inspection of the records of the Bureau, he (Judge Umali as well
as the other members of the Court below), had not found any indication that he had
expressed any opinion or made any decision that would tend to disqualify him from
participating in the consideration of the case in the Tax Court.

At this juncture, it is well to consider that petitioner did not question the truth of Judge
Umali’s statements. In view thereof, this Tribunal is not inclined to disqualify said judge.
Moreover, in furtherance of the presumption of a judge’s moral sense of responsibility this
Court has adopted, and now here repeats, the ruling that the mere participation of a
judge in prior proceedings relating to the subject in the capacity of an administrative
official does not necessarily disqualify him from acting as judge.

Appellant also contends that Judge Umali signed the said decision contrary to the
provision of Section 13, Republic Act No. 1125, 3 that whereas the case was submitted for
decision of the Court of Tax Appeals on July 12, 1955, and the decision of Associate
Judge Luciano and Judge Nable were both signed on August 11, 1955 (that is, on the last
day of the 30-day period provided for in Section 13, Republic Act No. 1125). Judge Umali
signed the decision August 31, 1955 or 20 days after the lapse of the 30-day period
allotted by law.

By analogy it may be said that inasmuch as in Republic Act No. 1125 (law creating the
Court of Tax Appeals) like the law governing the procedure in the Court of Industrial
Relations, there is no provision invalidating decisions rendered after the lapse of 30 days,
the requirement of Section 13, Republic Act No. 1125 should be construed as directory.

Besides as pointed out by appellee, the third paragraph of Section 13 of Republic Act No.
1125 (quoted in the margin) 5 confirms this view, because in providing for two thirty-day
periods, the law means that decisions may still be rendered within the second period of
thirty days (Judge Umali signed his decision within that period).

B. Identity of the two corporations: On the question whether or not Liddell Motors, Inc. is the
alter ego of Liddell & Co. Inc., we are fully convinced that Liddell & Co. is wholly owned
by Frank Liddell. As of the time of its organization, 98% of the capital stock belonged to
Frank Liddell. The 20% paid-up subscription with which the company began its business
was paid by him. The subsequent subscriptions to the capital stock were made by him
and paid with his own money.

These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the
authority to designate in the future the employee who could receive earnings of the
corporation; to apportion among the stockholders the share in the profits; (2) that all
certificates of stock in the names of the employees should be deposited with Frank Liddell

45
duly endorsed in blank by the employees concerned; (3) that each employee was
required to sign an agreement with the corporation to the effect that, upon his death or
upon his retirement or separation for any cause whatsoever from the corporation, the
said corporation should, within a period of sixty days therefor, have the absolute and
exclusive option to purchase and acquire the whole of the stock interest of the
employees so dying, resigning, retiring or separating.

These stipulations in our opinion attest to the fact that Frank Liddell owned Liddell & Co.
Inc. They guarantee his complete control over the corporation.

As to Liddell Motors Inc. we are fully persuaded that Frank Liddell also owned it. He
supplied the original capital funds. 6 It is not proven that his wife Irene, ostensibly the sole
incorporator of Liddell Motors, Inc. had money of her own to pay for her P20,000 initial
subscription. 7 Her income in the United States in the years 1943 and 1944 and the savings
therefrom could not be enough to cover the amount of subscription, much less to
operate an expensive trade like the retail of motor vehicles. The alleged sale of her
property in Oregon might have been true, but the money received therefrom was never
shown to have been saved or deposited so as to be still available at the time of the
organization of the Liddell Motors, Inc.

The evidence at hand also shows that Irene Liddell had scant participation in the affairs
of Liddell Motors, Inc. She could hardly be said to possess business experience. The
income tax forms record no independent income of her own. As a matter of fact, the
checks that represented her salary and bonus from Liddell Motors, Inc. found their way
into the personal account of Frank Liddell. Her frequent absences from the country
negate any active participation in the affairs of the Motors company.

There are quite a series of conspicuous circumstances that militate against the separate
and distinct personality of Liddell Motors, Inc. from Liddell & Co. 8 We notice that the bulk
of the business of Liddell & Co. was channelled 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.

During the first six months of 1949, Liddell & Co. issued ten (10) checks payable to Frank
Liddell which were deposited by Frank Liddell in his personal account with the Philippine
National Bank. During this time also, he issued in favor of Liddell Motors, Inc. six (6) checks
drawn against his personal account with the same bank. The checks issued by Frank
Liddell to the Liddell Motors, Inc. were significantly for the most part issued on the same
day when Liddell & Co., Inc. issued the checks for Frank Liddell 9 and for the same
amounts.

46
It is of course accepted that the mere fact that one or more corporations are owned and
controlled by a single stockholder is not of itself sufficient ground for disregarding
separate corporate entities. Authorities 10 support the rule that it is lawful to obtain a
corporation charter, even with a single substantial stockholder, to engage in a specific
activity, and such activity may co-exist with other private activities of the stockholder. If
the corporation is a substantial one, conducted lawfully and without fraud on another, its
separate identity is to be respected.

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 consequence of the organization and activities of
Liddell Motors, Inc.

Under the law in force at the time of its incorporation the sales tax on original sales of cars
(sections 184, 185 and 186 of the National Internal Revenue Code), was progressive, i.e.
10% of the selling price of the car if it did not exceed P5,000, and 15% of the price if more
than P5,000 but not more than P7,000, etc. This progressive rate of the sales tax naturally
would tempt the taxpayer to employ a way of reducing the price of the first sale. And
Liddell Motors, Inc. was the medium created by Liddell & Co. to reduce the price and the
tax liability.

Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co., Inc. to
Liddell Motors, Inc. on January 17, 1948 for P4,546,000.00 including tax; the price of the car
was P4,133,000.23, the tax paid being P413.22, at 10%. And when this car was later sold
(on the same day) by Liddell Motors, Inc. to P.V. Luistro for P5,500, no more sales tax was
paid. 11 In this price of P5,500 was included the P413.32 representing taxes paid by Liddell
& Co. Inc. in the sale to Liddell Motors, Inc. Deducting P413.32 representing taxes paid by
Liddell & Co., Inc. the price of P5,500, the balance of P5,087.68 would have been the net
selling price of Liddell & Co., Inc. to the general public (had Liddell Motors, Inc. not
participated and intervened in the sale), and 15% sales tax would have been due. In this
transaction, P349.68 in the form of taxes was evaded. All the other transactions
(numerous) examined in this light will inevitably reveal that the Government coffers had
been deprived of a sizeable amount of taxes.

As opined in the case of Gregory v. Helvering, 12 "the legal right of a taxpayer 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, 13
"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 mischievous fiction.

Consistently with this view, the United States Supreme Court 14 held that "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

47
as a shield for tax evasion and treat the person who actually may take the benefits of the
transactions as the person accordingly taxable."

Thus we repeat: 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.

C. Tax liability computation: In the Yutivo case:16 the same question involving the
computation of the alleged deficiency sales tax has been raised. In accordance with our
ruling in said case we hold as correctly stated by Judge Nable in his concurring and
dissenting opinion on this case, that the deficiency sales tax should be based on the
selling price obtained by Liddell Motors, Inc. to the public AFTER DEDUCTING THE TAX
ALREADY PAID BY LIDDELL & CO., INC. in its sales to Liddell Motors, Inc.

On the imposition of the 50% surcharge by reason of fraud, we see that the transactions
between Liddell Motors, Inc. and Liddell & Co., Inc. have always been embodied in
proper documents, constantly subject to inspection by the tax authorities. Liddell & Co.,
Inc. have always made a full report of its income and receipts in its income tax returns.

Paraphrasing our decision in the Yutivo case, we may now say, in filing its return on the
basis of its sales to Liddell Motors, Inc. and not on those by the latter to the public, it
cannot be held that the Liddell & Co., deliberately made a false return for the purpose of
defrauding the government of its revenue, and should suffer a 50% surcharge. But penalty
for late payment (25%) should be imposed.

In view of the foregoing, the decision appealed from is hereby modified: Liddell & Co.,
Inc. is declared liable only for the amount of P426,811.67 with 25% surcharge for late
payment and 6% interest thereon from the time the judgment becomes final.

As it appears, that, during the pendency of this litigation, appellant paid under protest to
the Government the total amount assessed by the Collector, the latter is hereby required
to return the excess to the petitioner. No costs.

48
SECOND DIVISION

[G.R. No. 142435. April 30, 2003.]

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, Petitioners, v. PACIFIC BANKING CORPORATION,
REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D.
TRINIDAD, Respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari seeks the reversal of the Decision 1 dated October 21,
1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners’
appeal from the Decision 2 dated February 10, 1993 of the Regional Trial Court (RTC) of
Quezon City, Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed petitioners’
complaint for annulment of real estate mortgage and the extra-judicial foreclosure thereof.
Likewise brought for our review is the Resolution 3 dated February 23, 2000 of the Court of
Appeals which denied petitioners’ motion for reconsideration.

The facts, as culled from records, are as follows:

Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela’s Export Trading"
(BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao,
Quezon City. BET was engaged in the manufacture of garments for domestic and foreign
consumption. The Lipats also owned the "Mystical Fashions" in the United States, which sells
goods imported from the Philippines through BET. Mrs. Lipat designated her daughter,
Teresita B. Lipat, to manage BET in the Philippines while she was managing "Mystical Fashions"
in the United States.

In order to facilitate the convenient operation of BET, Estelita Lipat executed on December
14, 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to
obtain loans and other credit accommodations from respondent Pacific Banking
Corporation (Pacific Bank). She likewise authorized Teresita to execute mortgage contracts
on properties owned or co-owned by her as security for the obligations to be extended by
Pacific Bank including any extension or renewal thereof.

Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to
secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to
"Mystical Fashions" in the United States. As security therefor, the Lipat spouses, as represented
by Teresita, executed a Real Estate Mortgage over their property located at No. 814 Aurora

49
Blvd., Cubao, Quezon City. Said property was likewise made to secure "other additional or
new loans, discounting lines, overdrafts and credit accommodations, of whatever amount,
which the Mortgagor and/or Debtor may subsequently obtain from the Mortgagee as well
as any renewal or extension by the Mortgagor and/or Debtor of the whole or part of said
original, additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the Mortgagor
and/or Debtor owing to the Mortgagee, whether directly, or indirectly, principal or
secondary, as appears in the accounts, books and records of the Mortgagee.

On September 5, 1979, BET was incorporated into a family corporation named Bela’s Export
Corporation (BEC) in order to facilitate the management of the business. BEC was engaged
in the business of manufacturing and exportation of all kinds of garments of whatever kind
and description 5 and utilized the same machineries and equipment previously used by BET.
Its incorporators and directors included the Lipat spouses who owned a combined 300
shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close
relatives and friends of the Lipats. 6 Estelita Lipat was named president of BEC, while Teresita
became the vice-president and general manager.

Eventually, the loan was later restructured in the name of BEC and subsequent loans were
obtained by BEC with the corresponding promissory notes duly executed by Teresita on
behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O.
Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the
corresponding trust receipt therefor. Export bills were also executed in favor of Pacific Bank
for additional finances. These transactions were all secured by the real estate mortgage over
the Lipats’ property.

The promissory notes, export bills, and trust receipt eventually became due and
demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank’s
demand letters, Estelita Lipat went to the office of the bank’s liquidator and asked for
additional time to enable her to personally settle BEC’s obligations. The bank acceded to
her request but Estelita failed to fulfill her promise.

Consequently, the real estate mortgage was foreclosed and after compliance with the
requirements of the law the mortgaged property was sold at public auction. On January 31,
1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder.

On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for
annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint, which
was docketed as Civil Case No. Q-89-4152, alleged, among others, that the promissory
notes, trust receipt, and export bills were all ultra vires acts of Teresita as they were executed
without the requisite board resolution of the Board of Directors of BEC. The Lipats also averred
that assuming said acts were valid and binding on BEC, the same were the corporation’s
sole obligation, it having a personality distinct and separate from spouses Lipat. It was
likewise pointed out that Teresita’s authority to secure a loan from Pacific Bank was

50
specifically limited to Mrs. Lipat’s sole use and benefit and that the real estate mortgage was
executed to secure the Lipats’ and BET’s P583,854.00 loan only.

In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners
Lipat cannot evade payments of the value of the promissory notes, trust receipt, and export
bills with their property because they and the BEC are one and the same, the latter being a
family corporation. Respondent Trinidad further claimed that he was a buyer in good faith
and for value and that petitioners are estopped from denying BEC’s existence after holding
themselves out as a corporation.

After trial on the merits, the RTC dismissed the complaint, thus:

WHEREFORE, this Court holds that in view of the facts contained in the record,
the complaint filed in this case must be, as is hereby, dismissed. Plaintiffs
however has five (5) months and seventeen (17) days reckoned from the finality
of this decision within which to exercise their right of redemption. The writ of
injunction issued is automatically dissolved if no redemption is effected within
that period.

The counterclaims and cross-claim are likewise dismissed for lack of legal and
factual basis.

No costs.

IT IS SO ORDERED.

The trial court ruled that there was convincing and conclusive evidence proving that BEC
was a family corporation of the Lipats. As such, it was a mere extension of petitioners’
personality and business and a mere alter ego or business conduit of the Lipats established
for their own benefit. Hence, to allow petitioners to invoke the theory of separate corporate
personality would sanction its use as a shield to further an end subversive of justice. 8 Thus,
the trial court pierced the veil of corporate fiction and held that Bela’s Export Corporation
and petitioners (Lipats) are one and the same. Pacific Bank had transacted business with
both BET and BEC on the supposition that both are one and the same. Hence, the Lipats
were estopped from disclaiming any obligations on the theory of separate personality of
corporations, which is contrary to principles of reason and good faith.

The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No.
41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The
Court of Appeals found that there was ample evidence on record to support the
application of the doctrine of piercing the veil of corporate fiction. In affirming the findings of
the RTC, the appellate court noted that Mrs. Lipat had full control over the activities of the
corporation and used the same to further her business interests. 9 In fact, she had benefited
from the loans obtained by the corporation to finance her business. It also found
unnecessary a board resolution authorizing Teresita Lipat to secure loans from Pacific Bank
on behalf of BEC because the corporation’s by-laws allowed such conduct even without a

51
board resolution. Finally, the Court of Appeals ruled that the mortgage property was not only
liable for the original loan of P583,854.00 but likewise for the value of the promissory notes,
trust receipt, and export bills as the mortgage contract equally applies to additional or new
loans, discounting lines, overdrafts, and credit accommodations which petitioners
subsequently obtained from Pacific Bank.

The Lipats then moved for reconsideration, but this was denied by the appellate court in its
Resolution of February 23, 2000.

Hence, this petition, with petitioners submitting that the court a quo erred —

1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE


FICTION APPLIES IN THIS CASE.

2) . . . IN HOLDING THAT PETITIONERS’ PROPERTY CAN BE HELD LIABLE UNDER THE


REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00 BUT
ALSO FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND
EXPORT BILLS OF BELA’S EXPORT CORPORATION.

3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY’S FEES IN THE EXTRA-


JUDICIAL FORECLOSURE IS BEYOND THIS COURT’S JURISDICTION FOR IT IS
BEING RAISED FOR THE FIRST TIME IN THIS APPEAL."

4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED


PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST RECEIPTS
DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND
THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.

5) . . . IN DENYING PETITIONERS’ MOTION FOR RECONSIDERATION AND IN


HOLDING THAT SAID MOTION FOR RECONSIDERATION IS "AN UNAUTHORIZED
MOTION, A MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY
CONSEQUENCE TO APPELLANTS."

In sum, the following are the relevant issues for our resolution:

1. Whether or not the doctrine of piercing the veil of corporate fiction is


applicable in this case;

2. Whether or not petitioners’ property under the real estate mortgage is liable
not only for the amount of P583,854.00 but also for the value of the promissory
notes, trust receipt, and export bills subsequently incurred by BEC; and

3. Whether or not petitioners are liable to pay the 15% attorney’s fees stipulated
in the deed of real estate mortgage.

52
On the first issue, petitioners contend that both the appellate and trial courts erred in holding
them liable for the obligations incurred by BEC through the application of the doctrine of
piercing the veil of corporate fiction absent any clear showing of fraud on their part.

Respondents counter that there is clear and convincing evidence to show fraud on part of
petitioners given the findings of the trial court, as affirmed by the Court of Appeals, that BEC
was organized as a business conduit for the benefit of petitioners.

Petitioners’ contentions fail to persuade this Court. A careful reading of the judgment of the
RTC and the resolution of the appellate court show that in finding petitioners’ mortgaged
property liable for the obligations of BEC, both courts below relied upon the alter ego
doctrine or instrumentality rule, rather than fraud in piercing the veil of corporate fiction.
When the corporation is the mere alter ego or business conduit of a person, the separate
personality of the corporation may be disregarded. 12 This is commonly referred to as the
"instrumentality rule" or the alter ego doctrine, which the courts have applied in disregarding
the separate juridical personality of corporations. As held in one case, where one
corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
‘instrumentality’ may be disregarded. The control necessary to invoke the rule is not majority
or even complete stock control but such domination of finances, policies and practices that
the controlled corporation has, so to speak, no separate mind, will or existence of its own,
and is but a conduit for its principal. . . .

We find that the evidence on record demolishes, rather than buttresses, petitioners’
contention that BET and BEC are separate business entities. Note that Estelita Lipat admitted
that she and her husband, Alfredo, were the owners of BET 14 and were two of the
incorporators and majority stockholders of BEC. 15 It is also undisputed that Estelita Lipat
executed a special power of attorney in favor of her daughter, Teresita, to obtain loans and
credit lines from Pacific Bank on her behalf. 16 Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and BEC, respectively. 17 We
note further that: (1) Estelita and Alfredo Lipat are the owners and majority shareholders of
BET and BEC, respectively; 18 (2) both firms were managed by their daughter, Teresita; 19 (3)
both firms were engaged in the garment business, supplying products to "Mystical Fashion," a
U.S. firm established by Estelita Lipat; (4) both firms held office in the same building owned by
the Lipats; 20 (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the
business operations of the BEC were so merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the
corporation itself had no visible assets; (8) the board of directors of BEC was composed of
the Burgos and Lipat family members; 21 (9) Estelita had full control over the activities of and
decided business matters of the corporation; 22 and that (10) Estelita Lipat had benefited
from the loans secured from Pacific Bank to finance her business abroad 23 and from the
export bills secured by BEC for the account of "Mystical Fashion." 24 It could not have been
coincidental that BET and BEC are so intertwined with each other in terms of ownership,
business purpose, and management. Apparently, BET and BEC are one and the same and
the latter is a conduit of and merely succeeded the former. Petitioners’ attempt to isolate
themselves from and hide behind the corporate personality of BEC so as to evade their

53
liabilities to Pacific Bank is precisely what the classical doctrine of piercing the veil of
corporate entity seeks to prevent and remedy. In our view, BEC is a mere continuation and
successor of BET, and petitioners cannot evade their obligations in the mortgage contract
secured under the name of BEC on the pretext that it was signed for the benefit and under
the name of BET. We are thus constrained to rule that the Court of Appeals did not err when
it applied the instrumentality doctrine in piercing the corporate veil of BEC.

On the second issue, petitioners contend that their mortgaged property should not be made
liable for the subsequent credit lines and loans incurred by BEC because, first, it was not
covered by the mortgage contract of BET which only covered the loan of P583,854.00 and
which allegedly had already been paid; and, second, it was secured by Teresita Lipat
without any authorization or board resolution of BEC.

We find petitioners’ contention untenable. As found by the Court of Appeals, the


mortgaged property is not limited to answer for the loan of P583,854.00. Thus:

Finally, the extent to which the Lipats’ property can be held liable under the real
estate mortgage is not limited to P583,854.00. It can be held liable for the value
of the promissory notes, trust receipt and export bills as well. For the mortgage
was executed not only for the purpose of securing the Bela’s Export Trading’s
original loan of P583,854.00, but also for "other additional or new loans,
discounting lines, overdrafts and credit accommodations, of whatever amount,
which the Mortgagor and/or Debtor may subsequently obtain from the
mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor
of the whole or part of said original, additional or new loans, discounting lines,
overdrafts and other credit accommodations, including interest and expenses
or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee,
whether directly, or indirectly principal or secondary, as appears in the
accounts, books and records of the mortgagee.

As a general rule, findings of fact of the Court of Appeals are final and conclusive, and
cannot be reviewed on appeal by the Supreme Court, provided they are borne out by the
record or based on substantial evidence. 26 As noted earlier, BEC merely succeeded BET as
petitioners’ alter ego; hence, petitioners’ mortgaged property must be held liable for the
subsequent loans and credit lines of BEC.

Further, petitioners’ contention that the original loan had already been paid, hence, the
mortgaged property should not be made liable to the loans of BEC, is unsupported by any
substantial evidence other than Estelita Lipat’s self-serving testimony. Two disputable
presumptions under the rules on evidence weigh against petitioners, namely: (a) that a
person takes ordinary care of his concerns; 27 and (b) that things have happened
according to the ordinary course of nature and the ordinary habits of life. 28 Here, if the
original loan had indeed been paid, then logically, petitioners would have asked from
Pacific Bank for the required documents evidencing receipt and payment of the loans and,
as owners of the mortgaged property, would have immediately asked for the cancellation

54
of the mortgage in the ordinary course of things. However, the records are bereft of any
evidence contradicting or overcoming said disputable presumptions.

Petitioners contend further that the mortgaged property should not bind the loans and
credit lines obtained by BEC as they were secured without any proper authorization or board
resolution. They also blame the bank for its laxity and complacency in not requiring a board
resolution as a requisite for approving the loans.

Such contentions deserve scant consideration.

Firstly, it could not have been possible for BEC to release a board resolution since per
admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners’ rebuttal witness, no
business or stockholder’s meetings were conducted nor were there election of officers held
since its incorporation. In fact, not a single board resolution was passed by the corporate
board 29 and it was Estelita Lipat and/or Teresita Lipat who decided business matters.

Secondly, the principle of estoppel precludes petitioners from denying the validity of the
transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on the
authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET
and BEC. While the power and responsibility to decide whether the corporation should enter
into a contract that will bind the corporation is lodged in its board of directors, subject to the
articles of incorporation, by-laws, or relevant provisions of law, yet, just as a natural person
may authorize another to do certain acts for and on his behalf, the board of directors may
validly delegate some of its functions and powers to officers, committees, or agents. The
authority of such individuals to bind the corporation is generally derived from law, corporate
by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or
acquiescence in the general course of business. 31 Apparent authority, is derived not merely
from practice. Its existence may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of
a special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as
the manager of both BEC and BET and had been deciding business matters in the absence
of Estelita Lipat. Further, the export bills secured by BEC were for the benefit of "Mystical
Fashion" owned by Estelita Lipat. 33 Hence, Pacific Bank cannot be faulted for relying on the
same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of
attorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers or
any other agent to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; thus, the corporation will, as against anyone
who has in good faith dealt with it through such agent, be estopped from denying the
agent’s authority.

55
We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent
credit lines of BEC. Suffice it to state that Alfredo Lipat never disputed the validity of the real
estate mortgage of the original loan; hence, he cannot now dispute the subsequent loans
obtained using the same mortgage contract since it is, by its very terms, a continuing
mortgage contract.

On the third and final issue, petitioners assail the decision of the Court of Appeals for not
taking cognizance of the issue on attorney’s fees on the ground that it was raised for the first
time on appeal. We find the conclusion of the Court of Appeals to be in accord with settled
jurisprudence. Basic is the rule that matters not raised in the complaint cannot be raised for
the first time on appeal. 35 A close perusal of the complaint yields no allegations disputing
the attorney’s fees imposed under the real estate mortgage and petitioners cannot now
allege that they have impliedly disputed the same when they sought the annulment of the
contract.

In sum, we find no reversible error of law committed by the Court of Appeals in rendering the
decision and resolution herein assailed by petitioners.

WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the Resolution
dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are AFFIRMED.
Costs against petitioners.

SO ORDERED.

56

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