CTA Case No. 64 (Decision)

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'� ' OECISIOO - C. T. A. CASE NO. 64 - 2- to the fourth quarter of 1949. After an exchange of memoranda between petitioner and r espondent and a rei nvestigation of the case hav ing been made , res- pondent Collector of Intern 1 Revenue on November 15 , 1952 , countermanded his denand as referr&d to in t he aforementioned deficiency tax assessment, subject however to the general review thereof by the then Board of Tax Appeals (now defunct) pursu unt to Section 8 , Executive Order No. 401 -A, Series of 1951 (pars . 18 and 20, STIFACTS). However, the papers relative to the case had not been forwa rded to the Board of Tax Appeals nor approved by it. After 1 another investigation , respondent , in a letter to petitioner on December 1 � 1954 , redetermined that the aforementioned tax assess ent was lawfully due the government and in additicn assessed deficiency I ) sales tax due f rom petitioner for the four quarters of 1950. Hence , respondent 's last derr.and was in t e total sum of �2 , 215,809. 27 , detailed as fo1lows J Def iciep_ll 75% Total s les T~x SL.r_ch.:rqe AJilouni ~ Assessment �1 ,031 , 296. 60 J773 , 472. 45 �1,804,769.05 (First) of Nov- ember 7, 19~ for deficiency Sales Tax for the peri od f r crn 3rd Qrtr. 1947 to 4th Qrtr. 1949 inclusive Additional As - sesseient for period from 1st to 4th Qrtrs. 1950, inclusive 234,880.13 176,160. 09 41. 14

DECISION - C. T.A. CASE NO. 64 Total amount de- - 3- manded per let- , 1, 266!176,73 f942 , 632, 54 P2 , 215 , 8Q9. 67 ter of December 16, 1954 From the last mentioned letter (decision) , petitioner filed on January 19, 1955 t he instant petit ion for re- view with this Court in accordance with Section 11 of Republic Act No. 1125. In connection wi th t he aforementioned assessments, respondent found that pet iti oner Yutivo Sons Hardware Co. (hereinaft er referred to a s Yutivo) was improperly paying its sales tax based on its sales of automobiles and trucks to Southern Motors , Inc. (Southern Motors for brevity). On the theory t hat Sout hern Motors was acting as an alter ego, instrumentality, conduit or ~ubsidiary of petitioner, r espondent determined that the sales by Yutivo to Southern otors were not �tran- sactions at arm 's length� and that the true vendor to . the public is in fact the peti tioner corporation, Yu- tivo Sons Hardw�re Co. Hence , the respondent computed the sales tax liability of Yutivo upon the selling price made to the public by Yutivo ' s conduit {Southern otors) and respondent accordingly assessed a defi - ciency sales tax fro~ petitioner after crediting the sales tax already paid by Yutivo. Yutivo is a domestic corporation organized in 1916 and prior to the World War 11 was engaged in the importation anci sale of hardware supplies and equip- ment. Aft r the war 1Yutivo resumed its business and until June, 1946, bought a number of cars and trucks .. 149 q

DECI~ l(.lll - C. T. A. CASE NO. 64 -4- from Gener 1 otors Overseas Corporation (General Mot ors for brevity), and Areerican Corporation licensed t o do busine~s in t~e Philippines , whie at the time wa s the sole importer of GMa t r ucks -nd cars (see pars . l, 2 , 3 and 4 , STIFACT ). General otors being the importer , and its salQs to Yutivo being deeme~ the original sal es, the former paid the sales tax thereon and no furt her sales tax was paid by Yutivo on its s l ea to the public. Me nwhil e, en Juno 13 , 1946 , Southern Motors waq organited far the primary purpose of engaging in the business of lling cars , trucks and spare parts. After incorporation of outhe:rn tAotors and until the withdrawal of General Motors from the Philippines in thft middle of 1947, the car and trucks purch sed from General Mot ors were sold by ~tivo to Southern Motors, who in turn sol d the same to th public in the Visayas and Mindanao (pars. 5 and 8 , STI~~TS). Yutivo sold these vehicles to Southern otors under ~ a distr"butorship agiee~ nt (Exhibit C�l) t a price based on the cost of the v hicles as obt inod fro General Motors pluo a mark-up thereon determined by Yutivo. Upon the said withdrawal of General Motors, Yutiv� beca the exclusive i orter and distributor of Chevrolet cars, trucks and sp r parts for the Visayes and Mindanao. Yutivo thereafter continued vdth its old prectico of Gelling vehicl s to Southern Motors (pars. 16 and 17, STIFACTS). As i~~orter . Yu- tivo paid sales tax on the ba is of its selling price ..... 150 /?j

DECISIOO~ C.T.A. CASE No. 64 to the Southern Motors. The sales tax prescribed --- by ections 184, 185 and 186 of the Tax Code being ~- collected only once on original sales, Southern Motors paid no sales tax on its sales to the public. Upon a review of the transactions between Yu- tivo and Southern Motors, respondent Collector de- termined that the latter was a mere instrumentality of the former. Hence , for purposes of dete~ning the proper sales tax due the government, respondent disregarded the corporate personality of Southern Motors and considered the sales by it to the public as the proper taxable sales of Yutive. The defi- ciency sales tax assessment now in dispute in this case is contested by petitioner on several grounds and the issues in this case being centered upon them, we briefly state the s thuas (1) That there is no valid ground to disregard the corporate perso�ality of outhern Motors and to hold that it is an ad- junct of petitioner Yutive; (2) Assumin th t the separate per- sonality of Southern Motors be disregarded, that the sales tax already ~aid by Yutivo should first be deducted from th selling price of Southern Motors in computing the sales tax due on each vehicle; (3) That the surcharge as been er- roneously imposed by respondent; and, (4) Th~t the assessment of the sales tax in question has already prescribedl We will discuss these grounds in th order given& It is a rule that a corporation has a juridical peTson?.lity distinct fro the persons, natural or juri- �' 151 17,

DEC I S I O O - C. t.A. CASE No. 64 -6- dical, that compose it. Ho ever, being a statutory creation, t he cor poration must exi st and operate only for legiti mat e ends. Hence, when the notion of corporate entity is employed to defeat public con- venience, or to co it fraud or rongful acts , the l aw recognizes the need for prot cting the interest of justice by �pier cing the veil of corporate fiction and l ooking beyond the corporate form to t he actual enterprise� . ong the instances in which this step is resorted to is when it s to prevent fraud upon the collection of gover~~ent revenues. There is no hard and ast rule in this particular step, but in any case however, t e matter is dependent upon the fa cts and circumstances in each case. Yutivo, a domestic corporation, was organized in 1916 Nith an aut orize capital stock of 600,000.00 divided into 600 shares with a par value of �1,000.00. At the time bf its incorpora- tion, 421 shar s were s~bscribed and f ~lly paid, of which 20 shares wer in the name of Jose Palanca Yutivo, 295 shares in th name of his two sons Yu Tiong ing and Yu Tiong Y (alias Yu Tiong Yee), 105 shares in the name of Yu Tiong Cuan (Yutivo's nephew) and 1 share in the name of Albino Sycip. These five persons were Yutivo's first directors (Exhibit 61). The original stockholders had gradually passed on their stocks to the younger generation and addi - tional issues of shares were acquired by them. To 152 lfs-

DECISIOO� C. T. A. CASE NO. 64 � .7- unders nd the various tr nsf rs and iasuea f toe 1 in Yutivo aa ell as in Southern Motors e give b l the family tr of th Yu (Yutivo orr Young) family, aubdivided into f r n ranch 8 I consisting f th fa lies of t e broth r Yu Tiong Yee and Yu Tion Sin, their irst cousin Yu Tiong Cuan and their other r lativ �� 1. Yu Tiong Y e (YU Tiong Y) � Lim Kick (or Li An Siu) A. Yu Khe Tha � ~n c. Yu (J. ne Yu or na Chang Li ng) � Yu So Kheng (H len Yu ei ) � David Sycip 2. Yu So Hui ( e ty Y. Lee) 3. u So n ( ne Y yc1 ) m. a hington yei 4. Y Heng i n (Fr nci aeo Yu or r nei s Yu ) ~. Yu Heng Chiu ( illia Y ) � Yu Khe Siong � Hoh Y u Wa 1. Yu ng Tiok 2. Yu u Tiok c. Yu Khe Jin m. S hi H. (So h!a Hu n or op 1a Hu n Y ) 1. Yu Y k Ti (Ji y u) 2. Yu Sio Chu � Y B n Tek (Yu T Siu) D. Yu Kh To o. Louia Huang � Yu he Tat (Yu Khe T 1) � Go 1u Li l . Yu \.b � YU Khe Tong a. Yu Chai Luan (Yu Chay Lua or YU Choi an or Young Choi Leun J � D lton Chen 1. J, rgar t Ch n (Chen Pi Y u or Pi Y Ch n ) � 2. Pilin Chen (Ch n Pi Ling or Pi Lin Ch n) 3. Alic Chen (Ch n Pi Yu o Pi Yu Ch n) 4. B tty Chen (Ch n Pi Chi or Pi ChiCh n) 5. illand Chen 6. Chen on en H. Y4 Chi u Ti (Yu Chiao Ti) m. Hu g C n J 9 (C. J . Hung) 1. Dorothy Huang 2. essie Hu ng 3. ~rcial Huan9 4. Huang Yin Ch n 1 53

DECISIOO - C. T. A. CASE NO. 64 - 8- I . Yu Been Kiat m. Simeon Sy J . Yu Bi Cbi u (Yu Bi Chu ) m. Frank Chou (Chou Pek Lok) K. Yu Bi Yong m. Poon Tso Chat L. Yu Bi Hiao m. T� a i I Gan {John Tsai) .M. Yu Bi Gan N. Yu Ti a (Yu I . Tiam or Yu Keh Hong m. Uy L m 1. Yu Chiao Chin (Nelson Yu) 2. Yu Chiao Chio 3. Yu Chiao Chun 4 . Yu Chi o Chong 5. Yu Chiao Hui 6. Yu Chiao Liok 7. Yu Chiao Peng 8. Yu Ki Eng 9. Yu Kim Hoe (Yu Kim Hae) 10. Yu Kim Khoan II. Yu Tiong Sing .� y Sio � Yu Eng Poh (Paul Young) � Khu Kiam Kia 1. Virgi nl. Young Teebankee (Siu Lc n ) 2. Lillian Youn1 (Si u K~m cr Lilli an Y. ~e ) 3. Diana Young Siu Hoa J 41 El sie Young Siu Uan) � 5. Ellen Young 6 . Catheri ne Young (Siu Han) 7. I ng r id Young (Yu Siu Tien) 8. Dorot y Young {Yu Siu Lo ) 9. A xander Yount 10. Yu Siu Young B. Yu Eng Sek m. Lim Giok Un C. Yu ng Ting (Yu Eng Tin ) rn. Li m Guat Cheng 1. Yu Nga Li an 2. Yu Nga Han 3. Y Peter c. L. D. Yu En Liong m. Nancy Tsok Young (Nancy Young or To Pek Tin or Peck Suan ) E. Yu En Hock � Uy Sa i Liu III. Yu Tiong Cuan A. Yu Cheng Thim 1. Yu ng Lok 2. Yu Eng Siong B. Yu Cheng Pho m. Li Lian Eng 154 /fi

DECISION- C.T.A. CASE NO. 64 -9- c. Yu Chang Kho o. Yu Cheng Hui E. Yu Cheng Hoay (Yu Cheng Hoai) F. Yu Leng Bian IV. (Relatives) A. Yu Chong Tek m. Ong Bi Li 1. Gloria Yu (Gloria Yu Ka Chu) 2. Paulino Yu (Yu Ka Oan or Ka Oan Yu) 3. AliceYu (Alice Ka Ho Yu) 4. Alexander Yu (Ka Kh ng Yu or Alexander Yang) B. Yu Ki San 1. Yu Ki Suy 2. Yu Ki Liong (Yu Ki Yong) 2. Yu Leng Tuan 4. Yu Tiao Hian ~. Yu Tiao Khun 6. Yu Tiong Tit 7. Yu Phi Hong 8. Yu Phi Khim There were two ubsequent incr eases in Yutivo�s aut o- rized capital stock such t at , as of June 13, 1946, it had an issued capital st ock of t3,000 ,000.00 divided into 30,000 shar s with a par value of ~100.00 each. In 1948 , Yutivo's capital stock was increased to f6,ooo,ooo .oo divide into 0,000 shar s with a par value of 100. 00. f this, there were 50 ,000 shares outstanding and issued as of the end of the year 1948 and cont i nued to be so during the year 1949 (see Exhibit �c� ). The stockholders of record of Yutivo as of various dat s hav been covered by the partial stipu- lation of facts but generally it can bo s aid that most of the stockhold rs ar e members of the Yu (Yutivo or You~g) family, hose na es are li5ted above, and ma- jority of th shares are h ld by them. "J .I 155

OECIIOO- C.T.A. CASE NO. 64 - 10 - Although prior to the war Yutivo was g ener~l ly limited to the hardw,re business , th f ollowing ex ... tract of th purpose clause of its articles of in- corporation (Exhibit EEE ) permits it to engage i n the purchase and sale of all kinds of mer handise , includ- ing that of motor vehicles. " � � � comp r ar, vender, i~port r, exporter y transportar articulos de fer- roteria , y ef ctos naval cs de todos clases pr oductos del pais y del xtranjero: operar n gocio de ventas al por ~ayor y menor de mercancias en general e importar , exportar y n go ci �r en t oda clase de mercancias; � � � eanwhile , Southern otors was organized on June 13, 1946 to engage in the business of selling vehicles, wit n authorized capital stock of t1 ,000, . 00 di vided into 10,000 shares with a par value of flOO.OO (par. 5 , STIF CTS; Exhibit ). At the time of its i ncorporation , 2,500 shares ( qual to �250, ) appear to have been subscribed in five (5) equal proportions by Yu Khe Thai, Yu !<he Siong, Yu Khe J i n, Yu Khe Siong nd ashington ycip. Yu Khe Thai, Yu Khe Siong and Yu Kh Jin; as ~hown by the above family tree, are brothers, being sons of Yu Tiong Yee, one of Yutivo ' s founders. Yu Eng Poh and Wa ahington Sycip are respectively sons of Yu Tiong Sing and Albino Sycip (Exhibit 71 -G), the latter two b ing a l s o co-founders of Yuti vo. ccording to the Articles of I ncorporation, of the said ubscriptions, t62,500. 00 was paid by the aforementioned subscribers , but the fact is the s aid sum wa s advanced by Yutivo 156 ' It!

DECISION� C. T. A. CASE NO. 64 - 11 - und r CBIAC Check No.� 0 25217 dated June 12, 1946 is sued in favor of Southern Motor s (par. 7, STIFACTS ; Exhibit 31 ). A review however of Tutivo's books of accounts nifests the absence of a record of said disbursement . The exp lan~tion given by petition r ' s principal officer nd star witness Yu Khe Thai in answ r t o que tion as t o ~hy payment wa advanced by Yutivo was t hat - � at the tim e have not yet d ocid~d he m ny stockholders will Yutivo want to sub- scrib share for th Sout ern }..otora and ho much each of the was abl to subscribe� . This stat e ent i i gnificant. Note that witnes d - clared �~h aven t decided�, indicating that it as Yutivo who had t he po er to determin ho the sub- scribers of Southern Jotors shares would be and to apportion such holdings among them. This decl ration clearly indicate that such shares wer in fact to be held nominally for Yutivo. It also discloses that ssrs. Yu ~1e Thai , Yu Eng Poh, Yu Khe Siong , Yu 1e Jin and Wa h ington Sycip 1 re merely nominal sub- s cribers of outhern Motors ' stock , holding th same as mere truste s of Yutivo or the nominees that ~utivo would or might subsequently n m � In fact thr~ e months after South r n otors was organized and following a resolution ado t ed on epte ber 25 , 1946 (Exhibit E) , the record of outhern Motors show t hat on September 30, 1946 the subsc~ibed capit l stock s reallocated in the follo in nnerl ~~ ' ,/ j 57 ) lfo I I JL

DECISION - C. T. A. CASE NO. 64 - 12 - Original Alloea -t tion I After per Arj:i~let Re- allocation l'fo. of Percen- No. of Percen- S ares tage l hares tag 1. Yu Khe Thai , 2 , 500 100% 700 28% Yu Khe Siong , Yu Khe J in, 'ru Eng .oh , Washington Sycip 2. Yuti v o Hard - ware Co. 0 0 1 , 250 50 3. Huang Chen Jung, Dalton Chen , Yu I Tia Yu Chl)ng T�6ck, Yu Cheng Kho , Ng Sam Bok 0 0 550 22% The fact that Yutivo , although not an original s b- s criber in the articles did ctually sub cribe to and app ars tc cwn at least 50 of Southern Motors' capital stoc~ as reallocated domonstrates Yutivo 's power and control over Southern ~otors capital stock , it incor- por ators and/or stockhold rs nominally appe_ring in its charter. 'oreover, it appears that Yutivo has been abi to bring in additional or new stockholders under petitioner 's declaration that they had not at first been decided as to who would be the subscribers. Under the re-allocation , all stockholders ere allegedly re� qui rod to reak full pay ent of their respective sub- scriptions. Here again , Yutivo pa id for whatever was due on all the sha res subscription without an actual transfer of funds from Yutivo to Southern otors for this purpose. This � as done according to petitioner by merely an accounting entry , crediting in the books ,J, \ 158 IJf /1

D l 100- C. T. A. CASE O. 64 - 13 - of Yuti o i n favor of South rn otor the s um of P187 , ~. 00 nd b in ing t he otal payment� by Yu- tivo to 250,000. 00. I t was xplained th t a mer e accounting ntry was &uff i ci t b cau i t woul d avoi d the ct 1 tr nafer of c by Yu�t ivo to ~outhern otors , ' hi c:h cash owl d ulti t" atoly b r etur n to Yut i vo in pur u nee f rrange nt pre- v1ou ly d to t he effect th3t t ern ~tors ' ca ould be h l d 1n deposi t by Yutivo. For the sh r sub eript i on , Yut ivo in turn made corr ending accountin try in i t s books, ch rging t he accounts of t er } ntion d i ndividu 1 bsc:ri b rs f o th ll gedly advanced by Yu ivo in paym nt of th ha � ln oth r ords, Yutivo had control of bot h purses �� �paym nt to South~rn Motors , l! edl y a corpor ation separ tely or ni% d, hie, verth l e a is k pt i n th eoff r s of nd under t h cont ol f Yu. tivo na the ha e Gubscription , alleg 1y . d by desi gnat subser i b r s , which ar effect d by er e gin t �he indi vidu 1 ccoun� s of h latta . ~ ther a char ge w s o b d ag nst the ecounta of t n m aUbae~ib r or ai d aub cribers r o to subscribe sh r es , h e ing no h in t 1 t t � � i ni i at d th subscr iption . app r t o con t!tut a unilat er 1 ct on the part of Yutivc. I or over, in t he cas of rg S o h h d 0 h r s in hia n me a ori gi n 1 ubscription , h had n ith :r eh :rg oc- count vith Yutivo nor vith South rn ~tor � ven the ~ . 15 9

DECl I � C. .A- CASE No. 64 - 14 - t hat id sh r eh r in Yutivo � c h book h subscription as t o be coll ct d fro his f tur eonting nt account ith outh rn loto (Exhibit MA-l-a), thus giving rise to n oblig tion of Ng Sa Bok of doubtful ch ract r. In fact, th 1,200 shares record in th name g Sam Bok (C rtifi- catea os. 12, 17 , 33, 63 and 83 f Exh!bi Certificates tlo � 116 and 1~ of Exhibit allegedly issu d to 1 have not be n by hi � co s � pet'tioner lleg s th t prop r char � h ve been de against ia ccount, but th making of � h rgc 1 r un11 t 1 ct of Yut1vo, self-� rving on 1 � th vein r the share reco ~n th na o Hu ng Ch n J � Like hat f tJg Sam � he kin out of h r subscription n outh rn tor wa ffected by u- tivo alone by .1ng ch r g s g in t th cc nt o Huang Che J 9 in 11 9 p ~ nt th eon. Th t aling out f th h r 1 ub criptio nd t t nsf and iaau nc of 2, h es (Crt fic,t No . 3, 2 , 44,~8 nd 77 of Exhibit GGG, Exhibit ana c r .. tific te No. 1 6 of Exhibi f ) r t 1'0 unilat eral cts of Yutivo. As e h ve st t e rli r, th ori n 1 ub- named or de i r. ockhold rs , fhai , Yu h Jin , Yu Khe ion , Yu Po n in ton yelp er ade by them 1 beh 1 of Yuti o nd houl d b d d � �� l G0

c0 . r 1� �l<t~- ro. 64 CA -1 - � � held by th in t h cone t of rustees of Yutivo. Although a re- alloe tion of the or ig nal ub cription wae mad on S pt mber 30, 1 � t h a i d not l os e t he ehar e e of b ing held in h lf of Yuti vo. Thi fact nou d ply with gr at force to tlos ar & r e orded in th n m a of Hu ng C Jung. lton r. Che, Yu I Ti m, Yu Chong Teck, Yu Ch~ng Kh n Ng Sa Do � con idering the fact th t th aub cripti n and t r nsfer of aeid ah re re nil t l1y f ct � Petitioner argu thet th s t ckh ld ra we r p id for their ah r � � I~ t ca~ of � 11 9 dly aub cribed h r ( 5 ,000.00) , it i ead y n t �p y t � r ff ct d in Yutivo' h o b c- counting ( xhibit otor (i g s d bit d for � ~ .ooo. In le terms, this t t n -- �south rn tor ov u ( utivo) 5,000. 00 .n Yu ivo owes o t h ~ -- d by Yutivo. Petit ion r nt w s o by e rg .. against g B � fin this to n no ou tran action for the r on th t p y n nnot bvio l y be m de by il t ral ct of Yutivo v n h r the a ct wa ancti by outh rn tor � Th r 1~ ot 1 in t � r cord ok greed to . i fact. th e cf 11th oth.r u cri r ( xc pt Waahin to Sy i }, indl r aceo ntin ntry ~ ., .I j 6l /?{

OECISICJ-.J- C. T. A. C E to. 64 - 16 - by Yutivo und r which it �advanced� funds to Sout horn otors to cov r payrn nt f Southern ~otors' shares nd acco ing y char g d th individual subscrib rs for auc amcunts. It hould be noted that th tranG ct ion as d sol ly by nd tw n South rn ~� tors nd Yu- tivo. In ffect , i t was Yutivo ho undertoo t. aubacr i pt. on of 1 r s , mploying th p r ona n d or � charged� with cor re pending account os no l stockhold rs. Ther ia no showing that th se n d kd Yutivo to . k such advances. tle wOther h nd , Yu- tivo h a ex rcis d n unusu 1 i nt �re t in 11 their subscripti ons , r iting p yro nts th r eon. course , Yu Kh r , Yu 'h Jin , Yu ne iong and Yu Eng Poh ~ere anif stly re ef t s sub cription , but considering that t ey er th principal offic r nd c n titut d th j or i ty of the Bo rd of Dir ctor a of both Yutivo nd South r n Aotors , their sub criptions to Southern .otor c pital tock in 19 could readily or easily b th t of Yutivo�a. ~r ov r , th e p r ona w re relat ed to ach ot r aa rot era or irst cousi ns . Th re was every re son for th to agree in ord r to pr ot ect their common intere t n Yutivo and outhorn otora. Febr u ry 2 , 1947 , t e is ued capital tock of outh rn otor � s incr sed ith an stock dividend (or ,000. 00) but a hav tat d above , the ori i n 1 h r iasu d to the n ed ub crib r re " . 16 2

DSCISION- C. T.A. CASE NO. - 64 - 17 - merely in trust for or held in behalf of Yutivo. It would ther fore follow that the stock dividends which ere fruits of , and sprung from , the original or principal shares were likewise merely held by them for Yutivo. On March 8 , 1947 , the issued capital stock was increased by an additional ubscription of 50,000.00 in 500 shares made by various persons . Except as regards Ng Sam Bok and David Sycip, � pay- ments� thereof were effected by merely debiting or charging the accounts of said stockholders and credit- ing the corresponding amount s in favor of Southern Motors , ithout actually transferring cash from Yutivo to Southern Motors or from the stockholders to Yutivo. It will be not ed that again in this instance , the �pay- ments� were effected by the mere unilateral act of Yu- tivo. Also, there is n ho ing that the designated subs- cribers did in fact subscribe to the stock. Yutivo , by virtue of its control over the individual accounts of the persons charged , ould necessarily exercise preferential rights and control , directly or indirectly, over the shares , it being the party hich really undertook to pay or underwrite pay ent thereof. There is no showing that the stock certificates were actually issued to them , for as a matter of fact the certificates were �issued� without any receipt or acknowledgment by them. The subscription being founded upon Yutivo �s unilater 1 acts , there is not hing to prevent Yutivo from sub- sequently negating it by merely declaring that there was no consideration therefore. And above all, 163

1 DECISlOO- C. T .A. CASE NO. 64 - 18- although no char ging of accounts had as yet been de by Yutivo nor paym nt d by the designated sub crib rs on F bruery 28, 1947, the certificates of stocks hav alr ady been issue on that date, at least nine (9) days before the alleged pay nt. this act, presum bly m d upon th autho zation of Yu- tivo who was th *gu rantor� or �banker� for such subscriptions, cnly a rve to prov th t Yutivo'a will could prevail over ~outhern tors and said stock- holders, aa well. anwhile, ther were thr � ad tion 1 in� crea es in the capital stock of outhern Motors, all of vhich �ere effect d by stock dividends in the years 1948, l 9 and 19 , resp ctively, at 100%, 1 and 50% on the outatandi g ahar � � However, if the stockholder of record was, s we pointed above, a re trustee of the shares for and in behalf of Yu- tivo it would foilow that the stock dividends, which constituted inv stmenta or existin har s, would l o be held by the distributee& in tcuat for and in be� half of Yutivo. Petitioner, in turn tried to how hat it was not at any time holding the majority of the shares in Southern Motors , rather it had transferred its shares to other stockholdeia. In thi5 connection, we giv below a tabulation of shares pmrportedly transferred by Yutivo to and thereafter recorded in the name of the designated shareholderss . . 16 !_l j

DECISIOO - C. T . A. CASE O. 64 � Yu Eng Poh - 19 - 1947 Yu Huang Chen Jung 1947 Transfer Ng Sam Bok from Yu- Yu Cheng Poh Transfer tivo Cert. Yu Seng Tiok from Yu - No. 23 Yu Su Tiok tivo Cert. Yu Heng Kian No. 1 50 Yu Heng Chien 150 Yu So Kheng Sycip 50 150 Betty Yu Lee 50 Huang Yen Cheng 75 Chen Chon Sen 100 75 Yu Khe Jin 50 Yu So An 1949 5 Tr nsfer 100 lexander Young fro Yutivo 100 Mina Yu Certs. Nos . 100 Yu Heng ian 50 Yu Heng Chin 13'' 47 '' 50 Yu o heng Sycip 1000 Betty Y Lee and 74"' Yu o s 133' Yu Seng Tiok 100' Yu Su Tio Ty Tek Ti 100' Yu Tiok C 66 ' Alexander Sycip 67 ' Yu Chai Loan 67 ' Yu Chian Ti Yu Chiao Feng 133' Yu Chiao Chong Yu Chiao Chun 134' Ng Sam Bok Yu Cheng Pho 200,' , Yu Khe Tat Yu Cheng Kho 266 ' ' Yu Be Chu 133'' Yu Bi Hiao 134 " Yu Bi Hong 66, 66 7,", , 200 ' ' ' 67 ' ' ' 134 ,,, 133' '' 134, , , 133''' 134,, , 165 Jj

1 DECISIOO - - 20 - C. T. A. CASE NO. 64 Yu Cheng Hoa i 1 33 ' ' ' Yu Cheng Hui 134''' Yu Leng Bian 133' ' ' Lil ian Young El s ie Young 33''' El len Young 33 ' ' ' Ingrid Young 33''' Alexander Yu 34',, 200' ' ' 3600 These t r ansf er s of shares were eff ected in 1947 and 1949. The transfer made i n 1947 was effected largely, if not Y'holly , by 'Unilateral acts of Yutivo. Consi- der ation to Yutivo for such transfer was obtained by alleged charges to the individual cha r ge accounts of the transferees in Yutivo's books. /e f ind, however , that each transferee did not initiate or acknowledge the charging of his account, and in fact there is no signature of acknowledgment thereof in the stock cer- tificate or stock and transfer book of t he person con- cerned to show th t the cert ificat e of stock was actually transf~rred to him. As regards the transfer � made on March 17, 1947 by Yutivo of its 1,000 shares under stock Certificate No. 23 (stock dividend of March l, 1947) , the same was allegedly distributed to those pers ons who sacrificed their private financial resources to aid and maintain Yuti vo employees during World War 11. As these shares were rec eived by way of stock dividends , no entry ther eof wa s made by Yutivo on its books. The obligation is admittedly a purely moral obligation but 166 1[1

DECI SION - C. T. A. CASE NO. 64 - 21 - petitioner al leged it has benefited from such humani - ta rian work. Never theless , we find that this transfer was not altogether above boArd. The s ha r es , althouqh re - ceive as stock dividends, had proprietary val ue, espe- cial ly considering that they involved voting rights in the corporation as \ ell as rights to receive future prof i ts from the corporation by way of dividends . The petitioner had converted a supposed mor al obligation into one which became material , and by recognizing the same the reby created a civil one . There \as in effect a remuneratory donat icn and in vie cf the absenc e of an acceptance no valid tra nsfer was effected. This is o considering the fa ct tha t t he shares wer� unilaterally registered by Yutivo in th names of th recipients. This is more partic ul arly tru in Sen who appe ars to be a fictitious person as will be dis cuss ed he reaft er. Ev n assuming that Chen Chon Sen existed, yet he could not have ac cepted th same as he was never in the Phi lipp ines nor has he mani - fested such acceptanc e. Moreover , no where is there a showing that this net was offici ally adopted by Yu - tivo ' s board of directors. We are t herefore of the belief that the aforesaid t r ansfers are fictitious. It i s l ikewise worthy of note that even the cer- tificates of stock issued to the abov -enumerated per- s ons for the stock dividends authcri zcd in 1948 and 1949 als o she ! no ackno~ledgrnent of their issuance 1G7

DECISI@IIN C. T. A. CASE NO. 64 - 22 - and t ransfer . I t is equally import a~t to bear i n mind f urt her that t he afo remention d stockholders ar e i mme - di ate r elatives (chi l dren , wife , hus band , brother or sister ) of t he Yutivo di rectors or principal stoc k- holders , and would ther efore be conveni ent dummies of Yutivo. Moreover , as r egar s t he 4 ,000 shares of stock owned by Yutivo in Sout her n Motors under Certificate of Stock Nos. 13 , 47 and 74 , special mention should be made of t he cir cumstances surr oundi ng t heir transfer. Ac- cor ding to petiti oner , these sha res were t r ansferred to t he p rson after properly charging then f or the par val ue thereof. ! n considerat ion of these transfers, Yutivo al le edly received promiss ory not es is sued by � t he t ransf erees (see Exhibits 68-N, 68~ t o 68-Z in - elusi ve , Exhibit s 68-AA t o 69-DD, i nc lusive , Exhibits Z-1, %- 2 and 3). Except for a few of t hem, most of t hes e not es ere siqned in behal of the pr omis sors, who wer e the t r ansferees of the st ocks , by thei r br others or f at hers. Thi s fa ct strongl y corroborates our pre- vious finding t hat these transferees were more dummies of Yutivo who serve as the nominal stockhol ders. Peti- t ioner' s al legation that Yutivo accepted t hes signa- tur es and rel ied on t he signatories is not creditabl e. It conf irms our obs ervat ion and conclusion that peti- tioner made use of nersons as dummi es in crder to fur- � ther its purpose of owning and keeping shares. More- over , in view of the relltionship existi ng betwe n the t r ansferees or promissors and t he principal off1cers of Yutivo , t he for cer, under the circumstances would not ". l 6 llf

DECISION - C. T.A. CASE NO. 23 ..- - 23 - be unwilling t ools to camouflage the s cheme of con - ceali ng Yutivo� s ownership thereof . Consider ing all related circumstances , we are therefore of the opinion and do not hesitate to so hold that t e above named person are mere nOmina l stockholders holding the shares for and in behalf of Yutivo. For the reason previously given above, it f ollows that the shares r eceiv d in the concept of stock divid ends by the above na e persons are simi - larly hel d in t r ust for Yutivo. Even if we were to conc9do arguendo that Yu Khe Tai , Yu Khe Siong , Yu Khc Jin , Washingtonor David Syc ip were stockholders ~ ~. the r-emainder of t he s res held by other inclividuul stockholders , who are mere dummies of Yu tivo , when added to t . e s ares recorded in Yutivo' s nnm will show t at Yutivo was at all times in control of the cajority of the stock of Southern otors and that the latter was a mere subsidiary of the former. W g~ve hereunder the percentage of Yu~ivo's share - holders , after granting that Yu ~e Thai , Yu Khe J in, a$hington Sycip , etc. are stockholdexs ~ ~. and considering the stcckholders , who are such by the uni- l ateral sets of Yutivo, as dummi es of Yutivo and t e Yutivo (Yu or Young) family. Total Tot 1 Total Percen- shares shares shares tage of in Yu- of Yu- owned owner- tivo's tivo 's shir;2 narni dul!!m1es As of Sept- ember 1940 Cert. N(.l. 1 - 1 , 250 1G9 ' ,!

- DECIS! C. T. A. B NO. 64 � 24 - Sh res i n the 1 ,550 62$ n rnes of Huang Ch n .Jung � Ng Sam Bok and Yu Eng Poh rurtrx t in t.,e na s of Yu Eng Pc , 1. ng Chen Jun , Sam Bok and 9 Yu Cheng Poh 4~0 1,4 7, 1, 1, 10 2 ,51 5 3,660 5 ,66 6. 6 divi- 11,3 .6 1 ,9 .6 ,, 170 I;

DECISION - C.T.A. CASE NO. 64 - 25 - Incidentally, it should be observed that the investigation of this case by revenue officers started about the middle part of 1948. Thereafter, besides petitioner itself, the other recorded stockholders holding substantial shares in Southern Motors began diffusing their shareholdings by transferring the same to their immediate relatives - either to their respec- tive spouses and children or sometimes brothers or sisters. thus, in 1949, the following transfers were effected: Yu Khe Siong - 600 shares to his wife Hoh Yau Wa. David Sycip - 40() shares to his brother Alexander Sycip. Likewise important to be taken note of is the tact that shares allegedly subscribed by Chen Chob Sen (Certs. Nos. 42 and 53) in 1947 and 1948 were transferred to his father in 1~9. Chen Chon Sen is allegedly the son or Dalton Chen and Yu Chai Luan (sister of Yu Khe Thai) but has never been in the Philippines and has always betnin China. The Income Tax returns (Exhibit 73-1) and Alien Certificate of Registration (Exhibit 71-B) do not show that he has a son by that name. It is manifest that he was a fictitious persons and a mere dummy ot Yutivo after considering further that shares purportedly issued to him were without consideration. In 1950, the follovihg similar transfers were eftectedt Y u Khe Thai - Boo shares to his wife Mina c. Yu 171 17t

DECISIO - C. T. A. CASE NO . 64 - 26 - Yu Bhe Jin - 200 har s to his won ""'u Yek TiJ 200 shares to daughter Yu Siok Chen and SOO shares to his child Yu Beng Tek. Dalton Chen , whose wife is Yu Chai Luen, sister ot Yu Kne Thai - 4oo shares to daughter Piling Che , 4oo shares to daughter Margaret Chen, 4oo shares to daughter Betty ChenJ and Yu Cheng Teh a close relative or Yu Khe Thai and a director ot Yutivo - 100 !hares each to his three daughters. Gloria Yu Ka Chu, Alice Yu Ka Ho and Pa~ine Yu Ka Gan. In the succeding years (1951-1952) os t or the prin- cipal stockholders actually diffused their sharehold- ings in Southern MOtors by transferring them to imme- diate relatives who were e ither their spouses or chil- .... dren or in a tew instances brothers or sisters . These transfers wer~ in addition to those effected by peti- tioner Yutivo on its shares in South rn Mobora which as earlier s_ at d were trans! rred to immediate rela- tives of persons ~o consti tuted the controllibg s tock- olders, directors and officers or YUtivo - children ot Yutivo 's founders , brothers Yu Tiong Yee and Yu !long Yea and Yu Tiong Sing nd their cousin YU Tlong Cuan. Thus the transferees thereof were largely the,.. children of Yu Tiong Yee , Yu Khe Thai , Yu Khe Siong , Yu Khe Jin , YU Khe To , Yu Khe Tat, Yu iam, Yu Chai T1 (including those in the name or husband , Huang Chen Juna), YU Cha1 Luan (including those in name of hus- band Dalton T. Chen, Yu Be Chu, Yu Bi Hiao , Yu Bi Yong , Yu Bi Gan children of Yu Tiong Sing - Yu lng Poh, e tc. and the children ot Yu Tiong Cuan -- Yu Cheng Kho , 172 llr'

DBCISIO ) C.T.A. CASE NO . 64 - 27 - Yu Cheng Pho, Yu Cheng Hoai , Yu Cheng Hui and Yu Ling Bian. And even after 19,0, many of these transfers were ettected by coaveyanoes to persons who wre still =tnorn, some by donations to them. Following a similar patt rn during th same period 1948, 1949 and 19,0, a like change vas effected by the ~~ockholders of Yuti vo �s capital otock whereby the large holdings o the principal stockholders were split up into smaller holdings recorded in the names or the children, spouses or brothers and sisters of the transfero~s tockholder . Thi s pat tern of diffusing stock ownership oth in YUtivo and Southern otors was evidently concei ved to avoid the investiga- tion then conducted by revenue authorities. Despite these purported change in stock ownership in both cor- porations , the Board of Directors and officers of oth corporations remained unchanged and .~9ssrs . Yu Kh Thai , Yu I\he Siong , Yu Khe Jin and Yu Eng Poh (all or the Yu or Young family) continued to constitute the jority in both boards . All these erely serve to corroborate the fact that there was a common ownership and interest in these corporations and that the principal stockholders had to effect the transfer in order to conceal the true ownership thereof by Yutivo of Souther n l.fotors and/ or the ownership of both corporations by the Yutivo (Yu or Young) family . The second aspect of the issue relates to the ques - tion as to ~ether the acts and transactions of Yutivo and Southern MOtors were such that the Southern 1rotors waa a mere agent, instrumentality , subsidiary , conduit 173

DECISION - C.T.A. CASE O. 64 - 28 - or alter ego or the f ormer. At the out t it is to be ob�erved that Souther n otors is under th management and control or Yutivo by virtue or the management contract ent r d into betw en the tvo parties (seep. 26 , Fold r No .3, BIR rec . ) . In tact, the controlling ajority (4 out or 1) of the Board of Direc tors ot Yutivo - - Yu Kbe rhai , Yu Ke Gin, Yu Ke Shong and Yu En& Poh - - is al so the controlling ajority {4 out ot 5) or the Board ot Directors of ~ ~outhern otors . t the sa ti e th princi al offic rs ot both orporations are id nt1cal as ay be seen b�low. 19'+6 - 1948 1948 to present Yu Tiong Yea - President Yu Kbe Th i - Gen. Manager Yu lhe Thai - President Yu Eng Poh - Tr asurer and Gen. nager A1 xander Sycip - Secretary Yu g Poh - Tr asurer Alexand r Sycip - Secretary SQUTlJEfi OTOR� 1~6 up to the pr esent Yu Khe thai - . Presid nt 4 Gen. ager Yu Eng Po - .Vice President Yu lhe Siong - Vice President Yu Khe reasurer Alexander Sycip - ecretary � In addition, both corporations have co on comptroller �, n the person ot Simeon y, husband of u Been 1at ho is in turn the sister of Yutivo ' s president, 7u e Thai. There is therefore no doubt that by virtue or such control, i: the business, financial and managem nt policies of both corporations could be directed toward comcon ends . o ther aspect r 1 tive to Yutivo �s control ov r Southern 174

D CI lOll ) C.T�� CASE NO . 64 - 29- ~tor' s op ration r l ates to its cash transactions . All cash assets of Southarn ~ tors were handled by Yutivo and all cash transactions of Sout hern :1otors vere actually maintained through Yutivo. ny and all receipts of cash by Southern ~tors includin its branches were transmitted or tran ferred immediately and directly to Yutivo in Manila upon receipt thereof. The cash receipts thereof are correspondin ly issued by Yutlvo and entered in the Daily Collection Report Exhibits l ' and 2), which is the basis of entries in YU- tivo' a cash receipts books, with a corr s ponding credit to the account of Southern Motors . All receipts are post d by Yutivo in its customers ledger and it also keeps the corresponding sales invoices of ears and trucks sold to Southern otors . However, no copy of the receipt is furnished Southern rotors nd no detailed entry is de th reor in the books of s outhern MOtors except f or a summary entry of the same (Exhibit CCCO) . Li wis e , all xpenses , purchases or other obligations incurred by Southern Motors are referred to Yutivo which in turn prepares the corresponding dinbur;sement vouchers and pay ent)in relation thereto, the payment being made out of the cash deposits of Southern otors with Yutivo vi if any , or in the absence thereof which occurrs generally, a corres ponding charge is made against the account of ~outhern ~~tors in Yutivo ' books . The payment~ !or and charges a1ainst S6pthern Motors are made by Yutivo as a matter or cour e an without need of any further request, the latter would advance all such cash require- 175

DECISION - C. T. A. CASE NO. 64 - 30 - ments tor the benefit of Southern Motors . AnY and all payments and cash vouohars are made on Yutivo Ita~ tionery and ade under the authority of Yut1vo�s cor- porate officers, without any copy thereof being fur- nished to Sout vrn Motor& {~1bit CCCC) . l de- tailed records such as ens disbursements cxpens s, purchases , etc . -- for the account. of Southern 11o ors are kept by Yut1vo and ~out ern Hotors erely keeps a &WIID8ry r ecord thereof on tha basis of infor t ion received fro Yutivo. All the c�oove plainly show tha't cash or funds of Southern Hotors, including those of its brancle"' which are d1rectl~ ~e~1tted to Yut1vo , are plac n the cus- tody and control of Yutivo , and subject to vitndrawal only by Yutivo . Since cash transactions ar3 the ~ost frequently r ecurring type of transaction) entered into by a business and cash is readily converted into other types ,or assets, it is evidently in line ~ith man's ac- quisitive ~nstinct (Yut1vo in this cas ) to ndopt the afore-qescribed "special control measures " to regulate ad, quately Southern ltotors activities towards Yutivo(s ends or pur oses . ~outh rn Motors' reso~ces baing under Yutivo�s control , tho roreer's operations and existence became dependent upon the latt r and we may aptly apply_ the adage her that 11he who controls tha pur_se controls the person". Consideration- of various ~ othor circumstance~, specially when tnlton tog ther, indicateu that Yutivo .., , J t76 !':f(

DECISIO. - C. T.A. CASE NO . ~ - 31 - treated Southern otors m9rely as its department or adjunct. As described above, t he accounting system maintained by Yutivo shows that it maintained a high degree or control ov r Sout her tors account control of th c nt ralized type , as though th latter ~8 a branch of the former . espondent contend th t YUtivo employ9d the ~ystem of branch accountin in its dealings with Southern Motors . On the ot her httnd , petit1onar rgu s that tb nccouhting sy~tem could not be that or branch accountin in that no profits of the alleged branch ( outhorn tor~) are remitted to an become the profit of t hoce of�1ce ( utivo � On the basi of strict accounting practice and procedure Yutivo had not compl$tely adopt d the r nch accounting in its de~lines with Soutnsrn tors, to to do so wo d obviously res~lt in n admission of r spondent �s view. , Ho � vor, if wa war to vi w th wholw system, we believe and find tha xcept for a few alteration which were tf cted so as not to e the atter 80 bbvious the accountin syst usually employed by the home or prin- cipal oftica in d alin with its branches had ba n fol- lowed by Yutivo n r 1 tion to Southern otors . re- view or petition r �eo ccounting system as d s cribed by it (EYhibit CCCC "ho s that Yutivo had adopted generally the methods ordin rily- e ploy d in branch accountin of the highly c ntr lizad control type. Under this meth0d, the princip 1 oftic (Yutivo maintains detailed ac- countin recor s or tr nches ( outh rn otors an its 177 l'ftJ

D (jiSIOl ) C. T� � CASC UO . 64 - 32 - bt anches ) on t he basis of d t ailed report and sup- porting dta submi t t d by said branches (Sout hern Motors and it branches in Cebu, I lmilo , Bacolod and Davao) . Thus dai ly or periodical but detail~d repor t s or sales and cash coll ecti ons ar submitted to th home offi ce by the branches which deposit the same in i ts (Yutivo ' s) bank account subject to the withdrawal � only by t he home office (Yutivo) upon it vouchers dulY prepared and approv d by it. In tact, the branches (~outhern Motors branches) usually held v3ry limited cash funds for potty cash xpenditures . Furthermore , as an additional practiv , th ho e office (Yutivo) keaps subsidiary r cords of the financial transactions of its branch s ( outhern fotors) and the latt r eeuerally ke ps accounting r cords on a summary basis depending sole'tn information obtain d from Yutivo (see pp. " 5.42-5. 43, ''Accountant ' s Handbook", 4th Revised Ed . by Wixon Kell , formerly "accountant ' s Handbook, 3d Ed . by Paton) . Under the syste~ of branch accounting the ho~w ~:rice maintains in its books an account called "Branch Office - - Current" and the branch correspondingly ko&ps in its books an account of "Home Office Q Current" . Under the system e ployod by petition r , !t ke ps an account of 110outhern totors - Current11 and correspond- ingly Sout hern Motors maintains the reciprocal account entitled "Yutivo - Current" (see Exhibit CCCC~. To this account is debit d and cr dited , as the case may be , the "sales" or cars and trucks by Yutivo to Southern rotors and t he coll ections or Sou t hern Motors branches which are .� 17 Af

DZCISION - C. T. A. CAS NO . ~ - 33 remitt d directly to Yutivo. Likewis , any and all x- pense or other di bursements are eft ct d by Yutivo tor outhern tors � oper ations s ince 11 cash funds are kept by nd are under the control ot Yutivo. I t i s a r gued by patitio~er that interest is paid by Yutivo at 6~ on ~outh~rn �otors� dapo~ 1t and Southern tor paid Yutivo 10~ on dv ces de to Southern otor s pursuant to a r s olution dat d s_pt. b r 25 , 1956 (Exhibit D) and thereLor- Due b sin ss transaction he or arrangement r etlectu s parat ness o! the two ntities, Yutivo and South rn . oto~s . it is to be noted that t his r solution is n mer unila- teral act o outhern J~otors . i pliedly ec pted by utivo, t same would not m - terially nl er the financial sit u tion as the interest would be rely nco nd xp nse in ~elation to each without any sum getting out of Yu ivo's coffers or con- trol. InS! ~, all transactlone hotwaen utivo and Southern .Motors a re r corded and eft ted by re debit or crodit ntries ag inst the eciprocal account in- tained in ~heir resp cted cooks or accounts nd indicate t he dependency of fouthern ' tors as e branch upon YUtivo~ "The act or ona corpo1� tion credi tin or debiting the other for c rta1n it s , or x ns s or ven m rchandise sold or dispose d is per- fectly co pati~le ~ h the idea r tne dom st1c eonr tsiutybsbideiinagryoor rctchtiengpaarent r branch, gency organization, Such operations ~ere call d for any way by the xi- gencies or convenience of th~ entire 1bus1n Gs . Inde d, accoQotine opar tion such ns these are inevitable, and have to L!ected in th or- "

D;oCISlO!f - o. 64 C� � � CAS - 34 - ditary cour or bus1n sa, wh rever the ho ort1e or a busln ss onterpriso �~tends its tr de to nother 1 nd throuch a branch or- fie ~ or through noth r ch~ne ~auountinc to the thin �" (Kopp 1 vs. Yatco , 77 Phil . 496, ~ 1-~12). Also mention d bov , ho v r, 1 tho fnct th t e proti or the branch s (l:outh... l4otor ) are not ro- a1 tted to th ho~ ortice (Yut1vo) nor t l!:en up on- nually or pe 1od1cally in it books. i s llusin ss practice is o v!ously r sort=d to, ota r wise the syste would pat ntly beco r neb ceo ntin n ti r by det t utiv~ � s Bche or cone lment. r o th view- point or utivo, this r eo 1 rin thnt it had lre dy compl te control of th cash r ~ourc of outh_,rn tors nd uch tr n8f r of profit co ld be err ct d by d cl tion or di ridends ap roved 1> t Board or Dir cto s, a body or n und r Y.utivo's con rol . t tro the ccountin y t , ot r r ct. cor- robor t o indep nd n tly show t h t out hern otors is o ot Yutivo. It is to be not d h t v n th ranch s of Southern otor (in eolod, Iloilo, c bu nd v o) tr at utivo- L nil their '~ ad Office" or "IIo Offic ' sho n by th ir 1 tt r s of r ittances or oth r corr spon nee ( 1- bits 2- , - D, 42- Ci, , 42-I, 4 - , 42- -21 42- K-3, - 42-K-4, 3, , - , 48- C, 48-D, 4 - , 8- , 48-G, ~ - H, 52-A nd 5 -B ) . corro:spon ences w r etu lly r e 1v by utivo and t h r f r nc t ~utivo t e head or ho off1ce 1 obviou r th !act t h t l ca collections or the Southern tor ' branch s r 180

D CISIO - 35 - - - C. T. J � CA E o. 64 remitt d directly to Yutivo. Take Exhi bits 52-A and 52- B tor instance , the r t r nee to Yutivo as the "Home O.ftic 11 is cl arly doduc d from the f ct that the a tton- tion or ~. Yu Khe To, ~ea urer (he is th shier) or Y\ltivo 1s called and he is not an never �as an eo- ploye of Southern .~otors fro 1946 to 1949 (s e Exhi- bit JJJJJ) . ded to this f'uct is that Southern lt.otors may freely use forms or stationery of Yutiv~ . Thus , credit e orandu issued by Southern rotors war made with the use of Yu'tivo credit e oranda for s, the heading of ~en having o~en erely cane lled \�.i�th tLe us ot typewriter and superi posed with the typewritten name of ��southern Motors, Inc . " ( 1b1ts 28 and 28- A to 28-U, inclusive) . Correspondence of Southern '-!otors branches nre rec ived airoctly by Yutivo as though Southern Motors~j~nil were but a part of Yu~ivo (see sta.:1ps on E:rl.a.ibit ~ , J , " and LJ lso Exhibits ).,3-A-2 1 43- A-4, 43- -o) . I._ is not i.i.sputed that Yutivo nd South ..rn Hotors occupy the sa a ofi'ices in Hanila - lto4 Dasmarinus. In J / 1ts dealirgs with e public or third persons, Yutivo r treated Soutl.._rn tors as one or its ae art nts . In" fact, corre~pondonc es addressed to ,)outhern Motors are r ceived by Yutivo in beaulf of outhhrn otors in the sa e way as any corresponctence ~ddressed to and intended ror Yutivo (Exhibits 3- , 3-A:.l, 3-B-1, t.3- -1, 43-A-~, 43- A-5, 47- , 47-2) . The fact that ~outharn Motors as n ~re d p rt- ment or adjunct ot Yutivo !s ame more patent ~n con- .. �' 181 /ft;6

DECISION - I . T. A. CASE NO. 64 - 36 - nection with the arrastre charges paid f or the nope- ration o f receiving , conveying , and loading or unload- ing'' of 1 ported cars and trucks on piers and wharves (see Secti on 1260 , Rv. Adm. Code; Webst r �s Interna- tional Dictionary, ol. I, p . 152) . I t i admi tted that upon the withdrawal of General Mot ors f r om its opera tions wi thin th Phi l i ppi nes , Yutivo became the importer of Gener al ot or s cars and trucks. !f such be the case , al l charges dir e ct l y incur.xed in the im- portation of such c , r s nd t r ucks should pr operly to treated as Yuti o �s char ges and expensas . However, in the i nstant case , we par t icularly note t .at while Yu- tivo p i d for the arr astre char ges which are incurred for th handling (rec iving , unloading and delivery ) or the import d cars and trucks from the incoming vessel for discharg at the Port of anila, the charges were deemed as mere advance s by Yutivo ana treated or rc� garded as expenses of Sout hern Motors . Thus , arrastra charges covered by cash disbursement vouchers of ~utivo in va,.ious amounts ( hibi ts 43-F, 43 - Il , 43- K, lr7- D and l{?-F) manifestly show that 1;hey were charg d against the account of Sou t hern Motors . In this connection, we have cane a detailed xamina tion of the books of ac- counts of Yutivo and uouthern lwtors and f ound that such was in fact the practice of Yutivo , From he Yut�vo subsidiary book on the account of Southern Aotors ( ~ hibits 55 A and 55- B anu the latt er ' s D s~urssment Book (E>hibit J3) , e f ound that all arrast re charges tor t he year s 1 7, 1948, 1 9s nd 1950, which had been ~ �' t 8 2

... .LSI O C. T�� CASE NO . 64 - 37 - paid by Yutivo and whi ch constituted s its expenses , h d in fact b en charged against outhern , .otors (see p . 1-2, 4- 8, 10, 12 of Exhibit 55-BJ pp . 4-17, 19, 21 , 23-32, 34-31, 4042, ~4-46, 50- 53, 55- 5 and 59 of Ex- hibit 55- ; pp. (odd number pages o y ) 13-25, 1- 1 or Exhibit ?3) . These arra tre c ar es incurr in the loading and unloadl.UJ or ported cars and trucks for Yutivo ana charg d to .iouth rn 1otors r ached a totul of 115,987. 11 etaile s follows: 1947 - arrastre 2 , 62 . 93 191+8 u 50 ,1/7. 8 - ~9\t- - 49 ,317-. 3 1950 - " 14,229. 27 In addition, t should ba noted that lthough ov rtime charges for h n of cars and �rue rom vess 1a were r questa by Yu ivo and ncurred as part of it acquisition COSts th9r f , wUC OV~rti 0 charg S baV likewise been harged against a d tr nt..d s e ens s of uouthern :totoro as shown by the related cash sbu s m nt vouch rs an supyort ng i.voice state ens <~ ibits 3-A, 3-B, 3-D-l). f Yutivo wer the mporter, those arrastr und ove me charg_s � re Yutivo �s .Apen~ s ln importing goods and not ~outhern ~tors� . inc thes charg s wer made against out!..eru :.otors , 1t plainly app ars th t Y tivo had sole au hor ty to alloc te its expen s eveu as aga st ou h rn otors i n t e s nse \ th t the 1 1~ a mere junct , br ch or uepar ment of the for -r . It n ces ar11y foll ows ~hat an~ and all 183 ley

DECISION - C. T.A. CASE NO. 64 - 38 - expenses ot Southern Motors are likewise treated as expenses of Yutivo and the whole enterprise of sell- ing of vehicles being a single entity or unit, it is immaterial as to which branch or department an expense is charged. A person can readily pay from any of his pocket because ultimately the reduction of his funds remains the same. An opposite view would be untenable and to o~ mind, Southern MOtors was in fact treated as Yutivo's adjunct . The fact that the arrastre charges are not borne by Iutivo is also noticeable in the price calcu- lation sheets (Exhibits 8-to 8-A t- 27, inclusive) of Yutivo wherein the acquisition cost of its imported ve- hicles which are billed to Southern Motors at a price equal to cost plus a mark-up of 12-l/2~ is determined, We note that said price calculation sheets of Yutivo do not include as part of the cost the arrastre charges for the unloading and handling of the vehicles at the port of entry (Manila), neither do they include other usual or ordinary charges incurred in the importations thereof, such as delivery [To Yutivo�s warehouse) and brokerage charges which form part of Yut1vo �s cost. In fact such charges are recorded as expenses ot Southern Motors , If these charges are Southern Motors expenses then it is the importer. But since Yutivo is admittedly the i m- porter , it would follow that the transfer of such charges to Seuthern Motors by Yutivo serves to corroborate the fact that Southern Motors is treated as a mere agency of the latter and it becomes unnecessary to distinguish whether such expenses are Yutivo�s or bouthern Motors�o 184

D CISlO - o. ~ C.T�� CAS � - 39- e proceed to anoth r aspect or the relation or the parties -- as regards the canag ent tees Which petitioner contends as b 1ng paid by SouJhern ~~ tQr~, as an entity saparat� rrom Yutivo, in consi- dera tion or �th s rvicas r ndered by Yut1vo �s ot ficers for Southern tors . The nagement fees due from outhern ~tor s to Yutivo for th years 1~ t o 1950 were taken up as expenses or Southern otors and cre- dited to th~ account of Yutivo (pp. ~~ 11, 13, 24, 46 and 59 or Journal , ~hibits 32, TTTT). It it war to be as su2ed that the two orcanizations are separate juri' dica1 ntities, the corresponding receipts or r ceivables should theref or be tr ated as inco e on the part ot Yu- tivo. Hovev r, such w s not the treatment of the manage- ant t es received or receivable by IUtivo. For on the other hand, Yutivo�s books (pp. 35, 46, 83, Exhibits Hl~ and 57) manifestly show that the manage ent tees tor the years 1~6, 19*? and 1~8 in th~ amounts ot 55,151.26, 81,306.~ and 112,952. 21, respectively, were recorded as "Reserv tor Bonus" and were tharefore a liability r eserve, not an inco account. Yutivo did not declare these nagament fees in its income tax returns tor the said years (Exhibits ~~, lfNR, 0000) but did ao onl7 i n 1~9 (Exhibit VVV) when th investication or this case was in progress. The "Resettve tor Bonua" out ot said nage nt tees trom Southern ~tors tor 1~6, 1~7 and 1~8 , and its sister organizations Sing Yee, Cuan and Yutivo , were subsequently dis tributed directlY 12 and credited in rayor of. th !!Ployees and directors or Yutivo. The ultimate effects ot these entrt s were ' . 18 5

DECISION - C. T�� C SB 0 . ~ - lto - that the naaement tees were paid directly t o Yuti vo Officers and � ployee s thereby 1 plying that said of- ficers nd e ployeea were also outher n Motors ' officers and mployeea . In other wor ds , there vas no way of d1st1nauishin a Yutivo officer or employ � f r om a Southern ~tors� otticer or employee , for the latter corpor tion is but a er depart nt or the for er and the 1 ' 1 fiction or separate entity between the two vas but sha , unreal and untrue. After r view or the above facts , w find th t the Sou~ rn Aotors was a ctually owned (or the majority ot the stock ther ot are owned' nd contr ol led by YU- t1vo and th t or r was a ere subsidiary, branch , ad- junct, conduit , instrumentality, alter &o or h chyra of the latt r . It is argu d that the organization ot ~outhern .~tors as a separate corporation va made to aep rat the business of r9tailing cars and trucks fro Yutivo�s h rdwar business . Bowev r , as we have earlier stated, the sa e was unneeeaaar.r because Yutivo never- theless financed principally, i f not wholl,, the busi- ness of outhern ors and actually extended all the credit to th latt r not only i n the form ot starting capital but also in the form ot credit s extended tor the cars and vebl*lea al legedly sold by Yutivo to Sout~ern Motors as well a advance� or loans tor the expenses ot the latter when the capital bad been �~hausted. Thus the increases in the capital stol k were made in advances or "gua:tantee11 payments by YutiTo and cr dited in tavor or Southern otors . The funds ot Southern r otors w re all m r1ed in the cash fund of Yutivo. At all times Yu- t1vo, thru otticers and directors common to it and Southern 186

DECI ION - C. T. A. CASE O. 64 - 41 - tors , exercised full control over the cash funds, policies, expenditur s and o}ligations ot th latt r . Upon all t h above tact , Southern MOtors would aptly be called the conduit, instrumant lity or a1ter ego ot ~t1vo � (Ballantine, Corpor tion 1~6 d. p. 3l4J Anderson, Limitation of Corporate Entity, pp. 312- 3131 both citin cases). Thar was no legitimate or bona fide purpos in tho organization of Southern tors. e app rent objective of its organization was to evade the payment of taxes, to depriv the government or its law- ful rev nu s. It is to be noted that the sales tax 11 collected nd p i d only once on the oricinal sale by the importer or produc r or n article . Bp first selling the cars and trucks t o Southern ,"otors at a price lower than that ott red to the public by Southern Motors, Yutivo , in rrect , detsr~ned the sal s ~ax on th b ais of its sales to Southern ~otor s , not on ths basis or sales made by Southern .!otor:. to the public . Petitioner argues that it had th right to r duce its taxes. While we agr e with pe titioner thnt it May employ legal means to reduce its taxes, yet it cannot resort to eans that would bring ebout th evasion oft axes . As we have already inti ted, arras tr charges constitute nor 1 and ordinary charges ot an importer because they are incurr�d by it in the unloadin�, hand- ling or bringing of th9 m_rchand1 se into t he Philippines . Charges or si~l ar n ture , such as ov rti e s r vices in custo preoi es , broksrag charges, deliv ry chnr ges t ro custo s� cuntody to the i porter~bodega , con- stitute nece sary incidents to and form part of th cost 1 ~7

DECISION - C. T. A. CASE NO . 2~ - 42 ... of t he vehicles imported by petitioner. In t hi s parti- cular case , the act of Yutivo in charging arrastr charges (and the other similar charges recited above) to Southern Mo~ors and treating these char ges as payable by Sout he rn ro t ors in the concept of expenses , had , for accounting purposes, the effect of reducing the cost of such vehi- cles to Yut ivo . By illegally transfer-r i ng or channelling arrastre and other charges to Southern Motors , Yutivo had in fact been able to reduce the cost and selling price of its cars and trucks. The reduction in the cost of the vehicles reduced the mark-up added by Yum tivo in the selling price to Southern ~t ors. This mark-up added was an arbitrary aaount and the minimizing of the aark- up percentage further reduced the selling price. A combimation of all these practices resulted in the reduction of the basis of Yutivo�s selling price, upon which price its sales tax liability is computed and assessed . Considering that tha sales tax on automobiles varies according to the selling price thereof, the evasion of sales taxes by petitioner through t he organization of Southern Motors stri kes the mind as a novel and nefarious scheme to defraud the government of its lawful revenue. We give below comparative figures . which show how Yutivo evaded iis sales tax liability even if we were to assume arguendo that Southern f�1otors 1s an anti ty separate from Yutivo . The computation is based on a s ale of a car to Southern l1otors by Yutivo at a price cooputed as �' 1 88

DECISION - C. T� � CASB NO , �~ - 43 - folows (Exhibit 20~A , price calculation sheet used as exar.tpl ) - 'urtoicveodure Price or car, c . i . f . Manila _ Add - Bank cha;ges etc. 92, 41 92, 41 f? ,396.43 f 2 , 396, 43 Conv rted t o Pesos , 894.71 4 , 8 9 4.� 71 Add - Arrastrs and i4,894- .. 71- ~ 100. 00 other charaes chan- 278. <1+ �4 , 994. 71 nelled to South rn Hotors, ( mount 298. 9+ arbitrary) ~~rtk-up of Yutivo (20%) !5, 873 . 65' f5' ,f93 . 6S Sales Tax therein 678. 73 {io% on first 5,000 20 in xcess) Selling price to r6 . 5\t8. 38 r 6. 571 . 38 Southern J.fotors -----Fro - the above alone it will be noted that th re is an evasion of sales t ax by J4. oo. If however, we disregard the sales to South rn itotors and compute the tax on the latter ' s eelling price to the public or ? 1450 , 00 (;xhibit 20), the sales tax would have been Pl , 035. 00 with a deficiency ofP260 . 27 on the part of Yuti vo , It i s app..ent that vading taxes cannot 1n any language be said to be a lawful business purpose. It 189

DZCISION - C. T. A. CASE NO. 64 - 44- becomes manifest therefore that the eatablishment of Southern Motors was and is in tact for fraud. It waa a ere device , contrived in order to take advantage of the legal fiction of �corporate entity. A corporation, being a juristic creatioh, must exist and operate only for lawfUl purposes or ends . It is a necessary corollary therefore that when a corporate device is employed to defeat public convenience, or to commit fraud or wrongful act s , or to effect illegal transact ions , the law and jurisprudence recognize hhe need for protecting public interest by ignoring the veil of corporate fiction and l ook thru the corporate screen to the actual enterprise. 11It is a general rule in Corporation Law, that a corporation once organized and regis- tered has a separate and distinct juridical personality from the persons composing it and from any other corporation though capitalized and/or controlled by it . However, as a creature of law, the corporation must operate and exist tor lawful purposes. Notwithstanding the long history of corporate entity , there are certain instances, as when the notion of legal entity is used to defeat public convenience , justify a wrong, protect fraud and defend a crime when , in the interest of justica , the law has 'pierced the veil of corporate fiction and looked beyond the corporate form to the actual ent e r p2r1is6eu� .s (J.J . !cCaskell Co. vs. U nited State s , . 5ol+; United States v. Milwauke hefrigerator Transit Co . , 142 Fed. 247, 255; American Fac- tors (Phi l .) Inc . v . Murphy Tire Corp. (C. A.- 1952) 49 O. G. ftO. 1, P� 189, 194). Thus, where a corporation is a �dummy, is unr9al or a sham, and serves no business purpose and in- tended only as a blind, the corporate form may be i gnored (Paymor vs. Commissioner (1945) 150 F 2d 334 , 336 , 337; Gregory v. Helvering (1935) , 293 u.s. 465, 79 L. Ed. 596), for the AV can- nat countenance a form that is bald and a mis- chievous fiction. So too, a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the r venue officers in pro- per cases, may disregard the separate corp- orate entity where it serves but as a�eQield .t J 8 0 /s"b

.. - lt5 - tor tax evasi on and trust the per son who actually may take the benefi ts o~ the transaction as the person accordingly taxable (Hig ins v. Smith, 1940), 306 U.s. 84 L. d . 406) . .for over! 'Wll re a corporate ntity is ao or an z d and controlled, and its affairs are so con- ducted s to ak it er ly n instru- ntality, agency, conduit, adjunct , hechur or olter eg_~ o! another, t h l egal fiction y b disr garded (Kop- pel (Phil . Inc . v. Yatco, 1~6, ?7 Phil . ~96) . It has been held that non two !actor! s ppe r as two epar t busin ss s one as a corporqtion nd the other as a ttn le proprietor hip -~ wh n in r ality they are but one, althou h as a corpor tion nd, b y le al fiction it is an entity separ te nd art f rom the other or tro~ the p1rsons composing it, the fiction or la~ which has baen introduce as tter of conv n1enc nd to subs rv the end or justice! cannot be invoked to further n nd subv. r ve or that purpose (La Compafta v. Kaisnha (1953) 9 O. G. O� 6, p . 2300); x x x" (Lidd�ll Co., Inc. v. Col1 c - tor ot Internal evenue, .~.A . se ~o . 186, in C.T. � ecision, Atgu t 11, 1955) . o the facts recited abov , it is anif st that YUtivo org niz~d, own and controls outhern otors. YUtivo contends that in organ1z1 Southern r~tors, it had only good ai s to be a ccomplished . However, as we pointed out arli r, the dcts subsequent to its organ!- zation and in the actual busine fUnctioning or the outhsrn lbtors itself confirm the vi w that the copp- oration w s in tact defrauding the government or its lawful rev nues. " intended or actual busin ss rune- tioning ot the corporation itself, not the taxpayer's aia to be acco ~lished vi the corporation is the test" (Jackson vs. Commissioner, CCA- 2, Ko. 26?, y , 1956, 1956 Ph Fed ax r. par. ?2~8 56- 1 USTC par 9506 a!f ' g 24 TC 1). Consid ring the attendant circumstances there- .~ 191 /sf'

DECISION - C. T�� CASE NO . 64 - 46 - tore, we find that Souther n !btors was a blind or screen and s rvod only to distort, conceal or hide the truth. It s rved mainly, if not solely, to escape taxation, contrary to b11 us1ness activity or purpose" for which a corporat device is justified (tational Investors Corp . v. lloey , 1~ F 2d 466 J Paymer v. Com- missioner, 15 F 2d 334 s see also Molin~ Properties v. Commission3r, 319 ~ . n . 436) . Finding that tioutbern MOtors was but a mare instrumentality, adjunct, anb- sidiary, bfanch, alter ego or h~chur of Yutivo , the technical dlfonse of separate corporate nt1ty ust ~ di~regardad to arrive at the tru tax liability of Yutivo . "As already s tated abvve , under th vidence tha sales in the ~Hilippines or the railway terials, achinary and sup plies icported here by ~ppel Industrial Car and Zquiprnent Company could have been as conveniently and efficiently trans- acted and handled - - it not more so -- had said corporation merely s tablished a eztabl~~aed a branch or agency in the Philippinss and obtained license to do business locally; and if it ha?Ldone so and uaid sales had tbh~ereen esefef mes c~~oybesuncho branch or agency , dispute ~hat thel- 1/2 per cent mer- chants� sal9s tax then in force would have teen collectiblt. So far as we can discover, there would be only one, but very i mportant, difference between the two schemes --a difference in tax l iabi- l ity amounting to th~ respectabl sum of P64,122. 51 in this case . To allow the taxpay r now to deny this tax liability on tho ground that the sales were made through another and distinct corpora- tion , as alleged broker, whsn wa have seen that this latter corporation is virtually owned by the former , or that they are pr acticall7 one and the same , is to sanctiou a c1rcwuvontion of our tax laws , and permit a tax evasion of 192

- 47 - no ean proportions and the consequent commission ot a grave injustice to the Govern ent. Not only thiSJ it would allow the taxpayer to do by 1nd1r ction what the tax laws prohibited to be done directly (nonpayment or legit! at taxes), paraphrasing the United States upreme Court in United St a tes vs . Lehigh Valley � Co., supra . (et 511)" (Yoppel (Phil . ~, Inc . vs . Y t eo (77 Phil . 496) . (The abstraction of the corporate entity will not be permitted to prevent nd pervert the r eal and obvious truth. A corporate entity is not sacred as to be per- mitted to become n instrumentality of, or a cloak for ' fraud and since as in this case, Southern Motors was organized nd did actually function to conceal the true revenues due the govern ent, we do not hesit te to hold that the transactions or sales or cars between Yutlvo and Southsrn l{otors were but a blind and a ere sbam. ouch transactions were not bona fide and oons1 - dering that the Southern Yotors was owned ond controlled by Yutivo, the transactions betw en the two were not at ��arm's lan th11 � Hence, the dater ination or the sales tax on the basis ot said transactions would be likewise unreal, both parties thereto being represented by com:on and not adverse , interests (see Campana vs. Harrison, 114 F 2d 400) . In tters relating to re- venues, it is the rule that the tax consequences or transact s depend upon and must be governed by sub- stance rather than by for (Riggins vs. Seith, 308 u.s . 473J eisa vs. Stearn, 265 u.s. 242) . It is also a rule that, for tax purposes, tax liabilities cannot � . ~ .t 9 3

DECISION - C. T. 4. CASE NO . 64 - 48- bs determined by transtorainc a sale by one person into a sale by another by using the latter as a con- duit through which title pass s (vo~~ ssioner vs . 6ourt Holdi-ng Co. , 324 u�� 331~. It is sclt-evident ' and we do no esita to so holJ tb 1; the bono. fid sales upon which th sales taJ liability or Yut1vo oust be det rmined are ose of Yutivo's djunct, 1nstru- mentality or alter u.9. (...outh rnP:otors) which w.re the f i rst or origin 1 sales bona fide (see Koppel (Phil . O lnc . vs . Yatco , supr�) � ) Proceeding to tho xt 1$Gue , p~titioner how ver contends th t v n ssumin6 that th~ sales bj South rn 1~tor to the public ar to be tr atad as th_ taxable transactions, nevertheles~ the sales tax should be based on ths g..,.oss s llin price thereof a!tor deducting the amount 11 tend d t.o cover tha Eale s t a}- previously de- clared in Yu lvofb sal s invoices to South rn ;btors . It is argu d hat Yutivo in making a sales to Southern Motor d1 . ctually s egre te the compon~nt9 of the gross sellU~ price n th invoice into the sollinu price proper and the tax thor or. Hence, pstitloner contonds that it ha in fac1; complied with General Circular No . 431 issue by rospo.l.~.dent to 1mplament the collection or taxe un r ~revisions of Sections 183, 184, 185 and 1 of the ational Int_rnal Rovanue Code . Petitioner turther nr&u s that its acts r ~garding the sales tax were on its th ory t at Yutivo and south~ rn ~~ors were separate ntities and tiat on this view it was not noces-

( D.:.CISIO - C. f . A. CASE NO . 64 - 49- sary then to se r egate the taxes in t he ~ale invoices ot Southern 1~tor s to th public . How ver since the Court disregarded the separ te jurid ~cal per sonality ot Southern Motors fro Yutivo nd con idered only one tor both , tha latt r should at least be d e d to have complied with said general circular . This Court, in an ear lier ease had ceca ion to pa upon a similar qu s- tion in the case or Liddell co. vs. Collector (L.T. A. Case lio. 186, d c1ded ugu t 31 , 1955). In that case, bowev r, I specitieally diss nted from the majority opinion or the Court penned by colleague , Judge Luciano, in the s nse that in justice to th_ taxpayer therein, I opined tl~t the tax deficiendy should be co~yuted upon the selling price after deducting there~ from the sales tax already paid to Liddell otors , the alter e~o or Liddell and Co any, and I quotea "Hovev r, I am constrained to dissent fr cm thllt J.Ort1on of th aid opinion which sustains the theory o! respondent Collector or nternal R vsnue regarding the amount to be paid. According to the computatioh of thg re~pondent , th~ deficiency tax should be computed on the ross selling price o! each car or truck d by Liddell :;otor , Inc . deducti ng or course th refrom the tax al- r eady paid by Lid~oll Coc~any , Inc . This way or computing the defici ncy tax is unfair, because the sellin3 price of Liddell ~tors , Inc. upon which the computation or the tax is basad, includes the tax already paid by Liddell 4 Company, Inc . practically imposing ~ tax a ready paid. sides the adop~iou or this procedure would 1n c D ain cases, ele- vate the rae et under 'lhich the trur is b sed. The late payme~ i s already penalized, through the imposition of surcharges; by adopting the theory of the Collectvr , we will be cfeating an ndditional penalty no t contemplated bY law. It is th refore my opinion , that petitioner i s liabl to pay only the tax determined upon the sell ing price obtained by Liddell Motors , 195

DECISI J- / C. ! .A. CASE NO. 64 I - 50 x. � I nc. aft deducting th tax l ready p id ~ Liddell P Co1 any, Inc � x X X X (Lidd 1 Co. v � Collector , u r Con. nd Dis . Op. ) I In r 1 tion to this c se, I see no r~ason fox modify n my for -quoted vi � I might v n dd in support thereof, that in thg instant cas Yutivo s ould b deem d or be given the b nefit of having complied sub- st ntially 1ith the provisions of said General Circu r No. 431. Henc , petitioner's li bil ty for s 1 t x s ould be only 820,549. 91 , xclu iv of th urc g h rein ft r to be di cussed. th other hand , my colla gu , Judg Luci no , vote to ply th m jority opinion in th Li d 1 c s to th sc t b r, h r in it \ h ld th ts obs rv d th t th pcrcen- fores id s d upon th lu in mon y .. 196

DECI~I ... C. T.A. CASE �o. 64 - ~1 - Liddell &Co~any, Ine. thru its agent 1.11.2. l.iddell tors � Ine. , nd o::: ot to deduct the amount of the t ex from th� ol s pric on hieh the t x was p id. (La �a product~ c �ny v � t~ited S~ates J (1929) 278 u� � 17&, 73 L. -a. ~1; V use & Striegel v. Kibbin, ). X X --ora , or te X )( It is appar n that inc -- n on y on vo v te... in thi cas for he edification o thP- COimU� t tion of the al tax d t in by th r pond nt nd in vi w of the bD nc �f th ry vote of tv� ju to r v e:b 0 u dify th doc aion of r pond nt in rel - t1t>n to the co )Utation of uen x, t t th th ~ .� 197

DECIS I G l - C.T . A. CASE NO. 64 - 52 - prevailing opinion and vote would be that of my col- league , Judge Luciano , who votes for th affirmance for of the computation. Hence,/lack o� the nee s nry two votes to alter or modify the deciaion of respon- dent Collector wh re the sales tax liability of petitioner was cornput d on the basis of th gro s selli~g pric of car and trucks sold by Souther n otors to the public , 'Jithout giving allowance for the reduction of the tax already p id, the same is deemed affirmed. ( In relation tc the penulti ate issue, pt'titioner contends that is should not have been held liable for the surch3rge of 1 osed under s~ ction 183 of th Tax Code on the ground that no fraud ~ involved in this case. As e h ve stat d earlier, tition r had chosen to create Southern 1otors as a sep r t corpor - tion purpo tedly to d al in v hicles , but ~e found that the sarne was organized to b come a subt rfug or instru- ntality for the purpose of evading or esc oing th payment of the corr ct a ount of sales tax which is 1 w- fully due the government. Thi as achieved by ch n- lling p rt of th co t charge� of Yutivo' 1 orted cars to South rn tors nd by treat1ng th s cost of r tiling, ther by red cing, for tax purpo ~, the selling p i c of s id cars very much low r than it ould h ve othez~ise been � Petitioner sho� ld b r poasible for th consequ nces of its acts of wilfully evading the tax s nd ccnsidering all the circum tanc � the s e warr,nt the 1 osition cf the fraud pen lty of 50% pursuant to S ction 1 3 (a) of th T x Code� .. l9 lt/f

D C!SION- C. . A. CASE NO. 64 - 53- b com s unneces ry for u to di$ cus s the 1 os ition of the 25 s ur e arg� f or lat payment of t he t ax , p - t i tiener aving r ais d no issue in rel ation ther to. oreover, it should be stated that th imposition of t ch sure ar ge or late pay nt o the ta x is ~andatory and imposed as a mat ter of cours �) The ulti ate i ssue raised and present d d- fense by petitioner is to the eff ct t at ~t is no l onger liabl for th lea t x, the h ving be n b rred by reason of prescription. Th facts r cit d above show that on Nov er 7, 195> re ponde t a-se t he sales tax d fie! ncy of petitioner for th third qu rter 1947 to the fourth quart r 1949, inclu iv (Ex- hibits 7 and 8). !h corre pending r turn~ fil d by petition r cov ring th for said period r fil d t the earliest on Octob r l , 1947 s regard t third quart r 1947. Pur u nt to Sectio 33! of the r x Cod ; under ordin ry circumstanc , the Coll ctor o Internal � evenue y s th t x ithin fiv (5) y r fro th filing of th r turn. In s uch th m nt in r el tion to th taxabl ye ra of 1947 , 1948 and 1949 had en don n N mb r 7, 195 f th am obviously within thl iv -Y r period pr cribed id c- t on 331. !h fact th t the eas nt qu ntly r it rat d in th d cisi of pond nt rna Dc ber 16 , 1954, dld not in ny w y th t th a s s essment wa de re on bly. r espond nt not only reiter t d the as~ yea~s 1947 to 1949 incluciv , but lik wi n .. n . 199

DECISION- C. ! �� C E NO. 64 -54 - assessment for ales ta x deficiency of petitioner covering the year 1950. It i also evident that the sale tax defici ncy a s s s ment for the year 1950 was made well ithin the five-year period as prescribed by S ction 331 of the Tax Cod � Moreover , in this parti- cular case , there 1 a finding t at petition r co- mittod fraud in the declaration and payment of i sales tax liability and that it acted fraudulently to escape or evade t e pay1 nt of taxes . The prescriptive period in this case would therefore be found in Section 332 (a) of the ational Internal Revenue Cod , and we quotes �sEC. 332. Exceptions A� to period 2( limit tj,on _{ a s �_ rnt nd colle :t1on of taxes . -~) In the case of a false or frau- dulent return wit1 int nt to vade t x or of a failure to file a return. the tax m y be assessed, or a proceeding in court for th collection f such tax may be begun without assessment, at any tim ithin t n ye rs after the discovery of the fftl-ity, fraud, or omission. � � Even assuoin u ndo that the five-year per�od pro- vided by Section 331 of the Tax Code is no longP.r avail- ebl , tht:! ass ssrnent in question was plainly made wi~ in the ten-y r period prescribed by Section 332 (a} cit d above . 1e ther fore hold that he a sess ents ~ ic re the tubjeet att r of review in this particular cas have all been made within the reglamentary p riod pre5crib d by the i~x Code. 1IN VIEW -F LL THE FORE~ ING , judgment is hereby rendfjred disiDl.&&ing the herein petition for :revi w and pet~t ione is hereby ord red to pay to respondent the sui ~f 1,266,176. 73 aa aales tax deficiency for the Ij II 200 II

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