CTA Case No. 673 (Decision)

-' ~EPU!tMC M m .E PBILI7PINEI COURT O-F 'f-AX AWEALS QUBOON CITY .; YUTIVO SOl S HARD1-IARE COHPANY, Petitioner, versus C. T�.L: � CASFS NOS . 673 , 675 and 870 CONMI SSIONER OF I NTE fiiAL REVENUE, Respondent . x- - - - - - - - -x DECI S I 0 N In these three cases , which were co nsolida ted be- ca use they involve the -same par ti es and the same issues, petitioner Yutivo Sons Hardvmre Company seeks the re- view of three sepa rate assessments of respondent Commis- sioner of Internal Revenue for deficiency income taxes . The deficiency assessments arose from the consolidation of the net taxable incomes of Yutiv0 Sons Hardware Com- � pany (hereinafter referred to as "Yutivo") and the Southern l'lo~ors , Inc . , during the years 1951 to 1954 , 1957 to 1958 and 1959 . . The parties are in agreement that the assessments involved are based on the ruling of this Court in C. T. A. Cas e No. 64, 11Yutivo Sons Hardware Company vs . .' Collector of Internal Reve.nue;u April 27 , 1957 , that 11Southern l'lotors was but a �mere i.nstrumentali t~~ , ad- junct , subsidiary , branch , alter ego or hechura of Yu- tivo . 11 As consequence of this decision , resp.qndent ruled tha t the income of Southern Motors should be consolidated with the income of petitioner . From 1951

DECISION - C'l'A CASES NOS . 6?3' 675 & 870 2 when the graduated corporate income tax under Republic Act No . 600 took effect, the consolidation of the in- comes of both would thereby bring about a deficiency of 8%represented by the �difference between the 2o% a ctually paid by the Southern Motors on the first it-100,000 . 00 of its net income �a nd the 28% on the same amount \tJhich Yutivo should pay under and by virtue of the judgment of this Court. The parties are also in agreement as to the correctness of the computa tions of t he taxes pa i d by pe titioner and Southern Motors during t he periods under consideration, as well as the amount to be paid by Yu.tivo in the event t hat these cases are decided in favor of respondent . The collision occurs in respect of the application of the holding of the Supreme Court in G. R. No. L-13203, "Yutivo Sons Hard\vare Company vs. Court of Tax Appeals and Collector of Internal �Revenue, 11 January 28, 1961, which is the appeal from C. T. A. Case Noo 64 of this Court, wherein it was held t hat "Southern Motors be- -. ing but a mere instrumentality or adjunct of Yutivo, t he Court of Tax Appeals correctly disregarded the technical defense of separate corporate e ntity in or- der to arrive at the true t ax lia bility of Yutivo 11 (p. 20, Decision) . Petitioner insists tha t this con- clusion of the Supreme Court should be limited to its sales tax liability, t he tax involved in that case; J

.' DECISION - CTA CASES NOS . 673' 675 & 870 3 while respondent counters that it should apply to all matters involving taxes, including the income tax on the incomes of both Yutivo and its sister corpora- tion. At this juncture, it should be stateQ. thrJ.t be- cause of the identity of the parties and the close sim- ilarity of the issues involved, these cases should be read in the light of the decision of the Supreme Court in G.R. No . L-13203. As a matter of fact, it might even be added that, for purposes of determining the taxability of Yutivo in its relation to Southern Mo- tors, they are merely the continuation of case G.R. No . 1-13203, with the instant cases involving the question of Yutivo�s income tax liability and the latter case deciding its sales tax liability. As a basis for the discussion of the question as to whether or not South- ern Motors is a mere instrumentality or branch of Yu~ tivo for purposes of these cases, the facts and legal principles involved in G. R. No . 1-13203 are therefore pertinent. � In support of its thesis, much stress is placed by petitioner on the statement of the Supreme Court that this Court ttwas not justified in finding that Southern Motors was organ.ized for no other purpose than to defraud the Government of its lawful revenues. 11 I 1t

.. DECISION - CTA CASES NOS . 673' 675 & 870 Since the Supreme Court found that Southern Motors was .not organized purposely as a tax evasion device, peti- tioner now contends that the premises supporting this Court's corporate disregard of Southern Motors ' sepa- r a te personality were expressly rejected by that Court. Inferentially , petitioner states that Southern Motors , having been found by the Supreme Court to have been organized in good faith and for legitimate purposes , it is entitled to declare as its own the income it ac- tually derived from its own business and to file an income tax return separate from tr..a t of petitioner . And averring that the assessments in� question are based upon the findings of this Court which were allegedly rejected by the Supreme Court, petitioner concludes that there is no basis for disregarding southern Mo- tors' separate juridical personality. vie are at a loss to see how petitioner deduced from the decision of the Supreme Court the conclusion I' that the identif y and merger of Yutivo and Southern Mo- tors should be limited only to the sales tax. In the first place, nowhere in the decision did the Supreme Court imply that it is only applicable to petitioner ' s sales tax liability. \{hatever the dialectics em- ployed, the Supreme Court held that Southern Motors being a mere instrumentality or adjunct of Yutivo, the separate corporate entity of Southern Motors should be

.. DECISION - CTA CASES NOS . 673' 675 & 870 5 disregarded to arrive at the true tax liability of � Yutivo .. By its decision , the Supreme Court looked beyond the corporate form of Southern Motors and ignored com- pletely its separate jural existence . In law and in fact, and for all practical purposes, Yutivo and South- ern }Jfotors are �merged , the latter being but a part of the former , acting merely as its department and sub- ject in all things to its proper direction and control for the purpose of its business . Thus the Supreme Court held: "We are , however, inclined to agree with the court below that SM (Southern Hotors) \lfas actually owned and controlled by petitioner (Yutivo) as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and main- taining stores for sp&re parts as well as ser- Vice repair shops . 11 (P. 13 , Decision . ) . This situation is not materially different from the not infrequent business practice of a manufacturing plant opening several departments or branches in dif- ferent localities or places for the purpose of selling its products and. maintaining stores and shops for spare parts and repair service. If the sale of the branch is the sale of the manufacturing p�lant , it must neces- sarily follow that the income of the former is the in- come of the latter . As stated above , much emphasis is placed by peti-

DECISION - CTA CASES NOS. 673' 675 & 870 6 tioner upon the statement of the Supreme Court that � Southern Hotors was not organized purposely as a .tax evasion device. But granting that what the Supreme Court had in mind in making this finding was that Southern Notors i.vas organized for a legitimate pur- pose, or even a business purpose which petitioner wants a us "to understand, perusal of the entire decision in G.R., No . L-13203 will readily show that, in ignoring the separate jural existence of Southern Mo tors , the Court cons .idered as significant the domination and control, because of common ownership, exercised by Yu- tivo over the former. As a matter of fact , the close relationship between Yutivo and Southern Motors be- cause of common ownership, and the management and con- trol of operations, cash transactions, policies and day-to-day activities dependent thereto, was the basis for the conclusion reached, whatever its articulation. vle see no importance in the allegation of petitioner that Southern Motors was organized for a legitimate purpose except for determining the imposition of the fraud pena1ty , which was precisely the purpose of the Supreme Court in ruling out the 5Q% surcharge imposed � by this Court. (Seep. 11, Decision.) Petitioner however argues that the circumstances prior to 1950, which were the bases of tne decision of the Supreme Court in G. R. No . L-13203, l~d ceased to

DECISION - CTA CASES NOS . 673' 675 & 870 7 exist after that year and t he relationship between Southern gotors and Yutivo .t hereafter had been con- siderably altered . Thus, petitioner alleges that it ceased to be a st ockholde~ in Southern Motors after 1950; that not all stockholders of petitioner are stock- holders of Southern Motors and vice-vers a ; that the br anches of Southern Notors had t heir set of operating officers separate and distinct from Yutivo; that South- ern Hotors opened its own bank accounts separate from petitioner; tha t Southern Motors had its own assets and property distinct from those of Yutivo; t ha t South- ern Notors had business transactions also involving motor vehicles wj_ t h entities which were engaged in business in competition with that of pe titioner; that Southern Motors filed claims against Yutivo arising from defects in cars and trucks sold by petitioner to it. In short , petitioner avers t hat the iq.dicia of control and identify on which the Supreme Court based � its conclusion in the sales tax case (G. R. No . L-13203) that Southern Motors was an instrumentality or adjunct of Yutivo \vera weeded out to s how beyond reasonable doubt the separate corporate existence and personality of Southern Motors. (Pp. 11-12, Petitionerts Reply H_emorandum . ) So far as ~ommon ownership , control and manage-

DECISION CTA CASES NOS . 673 ' 675 & 870 8 ment are concerned - the essential ingredients of case G. R. No � .L-13203 - we can see that they are .s t ill the import ant and significant components of these cases . A closer scrutiny of ~he evidence presented , both tes timonial and documentary , reveals tha t peti- tioner continues to have control and management over Southern Hotors (p . 94, t . s . n . ) . The controlling members of the Board of Directors of petitioner and thos e of Southern Notors continued to be in the same hands , namely: Yu 1.'he Thai , Yu Khe Siong , Yu Khe Jin, Yu Eng � Pho , Dalton Chen , Yu I\he To and Yu Cheng Kho (Exhs . K, p . 122; L, p. 47) ; and these directors named, who are brothers , sisters, cousins or close rela tives belonging mostly to t~e Young or Yu family , are the controlling stockholders of petitioner and Southern Motors (Exh . K, pp . 122 , 128 ; Exh . H-l)o The presidency of Yutivo and Southern Motors remained with Yu Khe Thai (p . 101 , t . s . n . ) . While Southern Mo- tors maintained separate �bank accounts, the ones authorized to withdraw from these funds were Simeon Sy, Yu Khe Jin, Yu Khe Siong and Yu Khe Thai (pp . 31- 34 , t . s . n. ) who -vmre the officers and/or members of the Boards of Directors of both petitioner and South- ern Motors . It should be noted that Yu Khe Thai, Yu 1Ihe Siong , Yu Khe Jin and Yu Khe To , controlling members

� DECISION - CTA CASES NOS . '- 673 ' 675 & 870 9 of the Boards of Directors of both Yutivo and Sout hern Notors, are brothers. Yu Eng Pho , another member of the Boards of Directors of both petitioner and South- ern Motors, i s the first cousin of Yu Khe Thai, Yu Khe Siong and Yu I<he Jin. Yu Cheng Pho, manager of the Cebu branch of petitioner, is the second cousin of Yu Khe Thai , Yu Khe Siong and Yu Khe Jin. (Exh. 1, p . 46 ; Exh . 1, pp. 6-7.) Yu Cheng Kho , another direct- or of both Yutivo and Southern Motors, is the second cousin of Yu Khe Thai , Yu Khe Siong , Yu Khe Jin and Yu Ifue To .. (Exh. 1, p . 47; Exh. 1, pp . 6-7.) Simeon Sy , who was formerly the common. comptroller of peti- tioner and Southern Motors during the years 1946 to 1950, continued to be the treasurer of Southern Mo- tors (Exh . K, p. 128) but at the same time the assist- ant to the president of Yutivo - Yu Khe Thai (Exh. 1, p. 57)a Those who owned substantial number of stocks of Southern Motors were Francis Yu, Simeon Sy , c. J. Hua ng and Yu Khe Tat . ( Exh . K, p. 125. ) Francis Yu is the son of Yu Khe Thai ; Simeon Sy is a brother-in- law of either Yu Khe Thai or Yu Khe Jin (Exh. 2, p . 6 and Exh. K, p. 144); and C. J . Huang , manager of the Cebu branch of Southern Motors, is the brother- in-law of Yu ~he Thai, pres ident of both petiti oner and Southern Motors (Exh. L, p. 144) .

DECISION - C'N). CASES NOS. 673' 675 & 870 10 All these merely serve to corroborate the fact that there was a common ownership and interest in the two corporations. While it may be true, as claimed, that petitioner did not in its own name hold stocks in Southern No tors, the owner.ship by the Yu or Young family, including their close relations, of most of the stocks of both corporations, and the control primarily dependent upon such ovmership, placed them in a posi- tion where the policies and daily activities of peti- tioner and Southern Motors were determined not as de- cisions of the corporations acting separately but by the Yu family acting collectively. There is, there- fore, no doubt that by v'irtue of such ownership and control, the business, financial and management poli- cies of both corporations could be and in fact were directed towards common ends. Csee p. 16, Decision, G. R. No. L-13203 . ) Consequently, we see no signifi- cance in the allegations of petitioner that it had never been a stockholder of ~outhern Motors ; that since 1951, 36 . 5% of its stockholders do not own �. stocks in Southern Motors and, similarly, 19% of the stockholders of the latter did not own stocks in the former; and that the stockholders of Southern Motors have sold, pledged or otherwise disposed of their shares .

DECISION - CTA CASES NOS . 673, 675 & 870 11 Likewise , the fact that Southern Motors is engaged in the substantial business of retailing new and used cars � and trucks , spare IB. rts and accessories , and operates car and truck repair shops and gasoline sta- .tions; tha t it purcha sed ne\v cars and trucks for retail not only from petitioner but also fro m Liddell & Co ., t he Rizal lvlotors , Inc., and the Nortpern Motors , Inc . ; t hat Southern Motors operates branches in Cebu , Davao and Bacolod is of no consequence because such arrange- ments are required by its business of assembling and selling vehicles and maintaining s tores for spare parts and repair service . To be able to cater to the whims and caprices of the buying public , petitione;- must have for sale not only the vehicles that it manu- factures or imports but also other makes and brands , . new or used , to accommodate t he differences in tastes , likes and pocket books of everybody, specially for trade-in purposes . Nor t he alle gations that Southern Motors paid its taxes; had its own employees; mai ntained separate de- pos its for its funds; kept ~ts own books of accounts; and filed its i ncome tax returns have any significance I in altering petitioner ' s identify \'lfith Southern Motors because these are merely formal , anticipatory designs to . cover up the true relation between both corporations . Common ownership of petitioner a nd Southern Motors by

DECISION - CTA CASES NOS . 673' 675 & 870 12 the YU or Young family, and the control and domination incident thereto , can have no different tax conse- quences merely by the separateness of books, employees, tax returns or payment of taxes . The separateness of the corporate entity of Southern Motors was disregard- ed by the Supreme Court ~n account of the fact that , essentially , common ownership of the stock was used to control and dominate it, and sine~ this is still the basic substance of these cases , we can see no cogent and compell.ing reason to modify the Court ' s decision. In the light of the above , we are of the opinion and so hold that, notwithstanding the allegations of petitioner that the facts prior to 1950, which were the bases of the decision of the Supreme Court in case G. R. No. 1-13203 had ceased �to exist after that year and the relationship . between Yutivo and Southern Mo- tors had already been altered , Southern Motors is still a mere instrumentality or branch of Yutivo so that its separate corp9rate entity should be disregarded to ar- rive at the true tax liability of petitioner even for purposes of income taxation. ~ Assuming, arguendo, that Xutivo and Southern Mo- tors are controlled by substantially the same interests, petitioner however argues that that circumstance by itself and without evidence of artificial shifting of )

DECISION - CTA CASES NOS . 673' 675 & 870 13 income or expenses from one to the other does not con- fer authority upon respondent to attribute to Yutivo the net income earned by Southern Motors. According to petitioner, the Tax Code contains no provision authorizing respondent to require or permit two or more corporations, even if controlled by the same in- terests, to file a consolidated return of their sepa- rate incomes. On the contrary, Section 24(a) of the same Code explicitly recognizes the separate taxability of 11every corporation organized in, or existing under the laws of, the Philippines, no matter how created or organized.tt It is therefore urged that instead of vesting respondent authority to consolidate the sepa- rate incomes of these corporations, the law merely authorizes him 11 to distribute, apportion, or allocate gross income or deductions" among them under the provi- sions of Section 44 of the Revenue Code. And such a limited authority may be exercised only when it is shown that a "distribution, apportionment, or alloca- tion is� necessary in order to prevent evasion of taxes or clearly to reflect the income 11 of the controlling and the con'trolled corporations. The relationship between petitioner and Southern l'1otors is a continuing one because the umbilical cord connecting them remains intact and uncut. As stated

. DECISION - CTA CASES NOS . 673, 675 & 870 above and ruled by the Supreme Court in case G.R. No. 1-13203, Southern Motors is merely a subsidiary or branch of Yutivo created for the purpose of sell- ing the vehicles it assembles a t �retail and maintain- ing stores for spare parts as well as service repair sho~s; and being merely an instrumentality or adjunct of petitioner, its separate corporate entity should be disregarded in order to arrive at the true tax liability of Yutivo �. / If Southern Notors is but a part of Yutivo, acting merely as its department or branch in selling vehicles at retail and maintaining stores for spare parts as well as service repair shops , with- out any separate jural existence, the income of South- ern Notors must necessarily be t he income of Yutivo. The income of Southern Motors is no less taxable in- come in the hands of Yutivo merely- because by its command and direction it is paid directly to Southern .. Hotors in the performance of its duty as a mere sub~ sidiary or branch of Yutivo; otherwise , the reach of t he income tax law can be delimited by technical re- fine ments or mere formalism. (Helvering v . Clifford, 309 U.S . 331 . ) Since income should .be taxed to those who earn it, despite anticipatory agreements designed to pr event vesting of t he income in the earners (Lucas v . Earl , 281 U. &. 111; Helvering v . Clifford, 309 U. S . 331; United States v . Joliet & Chicago R. Co ., 315

., ' DECISION - CTA CASES NOS . 673' 675 & 870 U. S. lflr; Commissioner v . Sunnen , 333 u.s. 591) , re- spondent is correct in _attributing to petitioner the net income earned by J outhern Motors . The fallacy of petitioner ' s position is its as- sumption t hat Southern Motors, for purposes of deter- mining t he taxability of Yutivo, is still a corpora- tion distinct and separate from petitioner . Herein lies the inapplicability of Section 44 of the Revenue Code . Petitioner and Southern lv:lotors are not two 11 organizations, trades , or busine~s x x x O'vvned and controlled directly or indirectly by the same interests" under the provisions of Section 44; they are one and the same taxable person , for purposes of taxation. � Anent the question as to whether or not respondent can validly assess the fraud penalty of 50%, we agree with pe titioner that this is already foreclosed by the decision of the Supreme Court in G. R. No. L-13203. In eliminating the 50% fraud penalty imposed by this Court in t h?-t case, the Supreme Court stated that Southern Hotors "!,vas not organized pu:vposely as a tax evasion device to defraud the Government of its reve- nues . The Court ruled that resort to tax saving devices without t he use of pretenses and forbidden devices to lessen or defeat taxes does not constitute fraud . (See also Liddell v . Coll . G. R. No. L-9687 ,

'' ' DECISION - CTA CASES NOS . 673 ' 675 & 870 16 June 30 , 1961. ) And it can hardly be said that there was a consistent underdec1aratio.n of' substantial in- come by petitioner in not reporting as its own the net income earned by Southern Motors during the periods covered by these ca'ses (1951 to 1954, 1957 to 1958 and 1959) because in G. R. No . L-13203 , which finally determined the true tax status of Yutivo in relation to .Southern IY1o.tors , was decided only on J�an- uary 28 , 1961, �which was after 1959. l!."'ven then , there was still a difference of opinion as to whether the conclusion reached by the Supreme Court in that case applies also to the i ncome tax liability of petitioner . \lith this finding that there is no element of fraud present � in petitioner ' s failure to include the net income earned by Southern lvlotors in its income tax returns , the right of respondent to assess the deficiency income tax for 1951 has already� prescribed . There is no evidence as to when petitioner filed � its 1951 income tax return but it is not disputed that both Yutivo and Southern Motors filed separate in- come tax returns for their respective incomes in that year within the peri od provided for by law . Since the deficiency income tax assessm~nt for 1951 was issued by respondent only on December 17, 1957 or more than five (5) years after petitioner ' s income tax return was filed , the right of respondent to \

l DECISION - CTA CASES NOS . 673, 675 & 870 17 assess deficiency income tax for 1951 has already prescribed under Section 331 of the Tax Code . Having found that the deficiency assessment for the year 1951 has already prescribed, and after eliminating the ' O% surcharge imposed by respondent from his other deficiency assessments, petitioner Yutivo Sons Hardware Company is hereby held liable and ordered to pay the Commissioner of Internal heve- nue: (a) From 1952 to 1954, inclusive, the total amount of !'24,ooo.oo, plus 5% surcharge and l% month- ly interest from January 16, 1958 up to the date of payment but not exceeding 36%, under C. T. A. Case No . 673; (b) For 1957 and 1958, the total amount of ~16, - 000.00, plus 5% surcharge and l% monthly interest from J"uly 11, 1959 up to the date of payment but not exceed- ing 36%, under C. T. A. Case No . 675; and (c) For 1959, the amount of ~8 ,iL09 .26 , .. .i:nc:TI.u- sive of 1/2% monthly interest on �8,000 . 00 from April 19, 1960 to July 11, 1960, plus the delin- quency penalties incident to late payment under Section 5l(e) of tne National Internal Revenue Code, as amended by Republic Act No . 2343, under CoT . A. Case No . 870 .

. -. ~ ~ ( , DECISION - CT .1. CASES NOSo 673' 675 & 870 / 18 "1-f.l:IEREFORE, with the foregoing modifications, the appealed dec~�~ion/ are hereby affirmed, with- out pronouncement to costs. SO ORDERED. Quezon City, September 30, 1968. ~ ROHAN H. UMALI ~ Presiding Judge I:JE CONCUR: . . J ~US~- .~ ALVARE� ~~ Associate Judge ' . L-1~- � RA1-10N L. AVANCENA . Associate Judge (v6f