KOPPEL PHILIPPINES, INC. vs ALFREDO L.
YATCO, owned 995 of the 1,000 capital stocks from the year
Collector of Internal Revenue
DOCTRINES:
Disregard of Corporate Fiction - A corporation will be
looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears but, when the notion
of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons.
Control by another corporation - The corporate entity is
disregarded where it is so organized and controlled, and its
affairs are so conducted, as to make it merely an
instrumentality, agency, conduit or adjunct of another
corporation.
FACTS:
Defendant Collector of Internal Revenue is now Mr.
Bibiano L. Meer in lieu of Mr. Alfredo L. Yatco.
Plaintiff Koppel (Philippines) Inc., (Koppel Phil for brevity)
is a corporation duly organized and existing
under and by virtue of the laws of the Philippines,
with principal office in Manila,
the capital stock of which is divided into 1,000
shares of Php100 per share.
Plaintiff at all times was and is duly licensed to
engage in business as merchant and commercial
broker in the Philipines and is
the holder of the corresponding merchants and
commercial brokers privilege tax receipts.
The Koppel Industrial Car and Equipment Company (Koppel
Industrial for brevity),
a foreign corporation organized and existing under the
laws of the State of Pennsylvania, USA and not licensed
to operate here in the Philippines,
1928 to 1936, the remaining 5 were owned by the
officers of the plaintiff corporation Koppel Phil
Some time in Feb 1929, Miguel J. Ossorio placed and option
to purchase within 3 months, with Koppel Industrial a pair of
Atlas-Diesel Marine Engines. Koppel Industrial purchased said
engines from a supplier in Sweden for $16.508.32. Ossorio
called the deal off, Koppel Industrial could not ship to or draw
on Ossorio so in turn, it drew a draft on plaintiff Koppel Phil for
the same amount at 6 months sight, with the understanding
that Koppel Industrial will reimburse plaintiff Koppel Phil when
said engines were disposed of. Koppel Phil honored the draft
and debited the said amount from the merchandise account.
April 1930, a new local buyer, Mr. Cesar Barrios, was found
and the same engines were sold to him for $21,000. The
engines were shipped to Hongkong and a draft for the $21000
was drawn by Koppel Industrial on Mr. Cesar Barrios. After the
draft was fully paid by Mr. Barrios, Koppel Industrial reimbursed
Koppel Phil $16,508.32 and credited with it $1,152.95 as its
share of profit on the transaction.
Koppel Phils share in profits out of the transactions
described totalling P3,772,403, amounts to P132,201.30, and
that plaintiff Koppel Phil returned the aforesaid amount of
P132,201.30 for the purpose of the commercial brokers 4% tax
and paid P5,288.05 as such tax.
The defendant CIR demanded P64,122.51 as the merchants
sales tax on the P3,772,403.82, representing the total sales
value of the sales mentioned, including 25% surcharge for late
payment of the said tax, deducting the P5,288.05 paid by
Koppel Phil. October 1936, Plaintiff Koppel Phil, paid the P64k
under protest in order to avoid further penalties, levy and
distraint proceedings. Defendant CIR, overruled the protest and
has since then, refused to return the said amount.
A preponderance of evidence has established that Koppel
Philippines, with 995 of its 1000 shares of stock was owned by
Koppel Idustrial and only 5 shares was locally owned, by its
officers. Koppel Phil was a representative of Koppel Industrial
and not a mere agent of Koppel Industrial and the local
purchasers.
CFI: Ruled in favour of the defendant CIR, ordering Koppel Phil
to pay the deficiency in tax payment, and dismissed Koppel
Phils complaint with costs to it.
ISSUE:
1. Whether Koppel Phil is a domestic corporation, distinct
and separate from Koppel Industrial and not a mere
branch of Koppel Ind.?
2. Whether Koppel Phil was organized as a Phil Corp for the
purpose of evading the payment by its parent foreign
corporation of merchants sales tax on the transactions
involved in this case and the like?
3. Whether Koppel Phil is liable to pay the P64k tax on the
total income of Koppel?
RULING:
1. The lower court did not deny legal personality to
appellant for any and all purposes, but held in effect
that in the transactions involved in this case the public
interest and convenience would be defeated and what
would amount to a tax evasion perpetrated, unless
resort is had to the doctrine of "disregard of the
corporate fiction."
In other words, in looking through the corporate form to the
ultimate person or corporation behind that form, in the
particular transactions which were involved in the case
submitted to its determination and judgment, the court did so
in order to prevent the contravention of the local internal
revenue laws, and the perpetration of what would amount to a
tax evasion, inasmuch as it consideredand in our opinion,
correctlythat appellant Koppel (Philippines), Inc. was a
mere branch or agency or dummy ("hechura") of Koppel
Industrial Car and Equipment Co. The court did not hold that
the corporate personality of Koppel (Philippines), Inc., would
also be disregarded in other cases or for other purposes. It
would have had no power to so hold. The courts' action in this
regard must be confined to the transactions involved in the
case at bar "for the purpose of adjudging the rights and
liabilities of the parties in the case. They have no jurisdiction
to do more." (1 Fletcher, Cyclopedia of Corporation,
Permanent ed., p. 134
In the case of United States vs. Milwaukee Refrigeration
Transit Co. The court said that; "If any general rule can be
laid down, in the present state of authority, it is that a
corporation will be looked upon as a legal entity as a general
rule, and until sufficient reason to the contrary appears; but,
when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons."
2. The SC found that, in so far as the sales involved
herein are concerned, Koppel Phils and Koppel
Industrial are one and the same, that Koppel Phil is a
mere branch, subsidiary or agency of Koppel
Industrial. This is conclusively borne out by the facts that:
a. the share in the profits of Koppel Philippines was
ultimately left to the sole, unbrindled control of
 Koppel Industrial. No group of businessmen could be
expected to organize a mercantile corporationthe
ultimate end of which could only be profit if the
amount of that profit were to be subjected to such a
unilateral control of another corporation, unless
indeed the former has previously been designed by the
incorporators to serve as a mere subsidiary, branch or
agency of the latter.
b. Koppel Phil charged Koppel Industrial, at cost, for
merchandise out of its own stocks to complete
deficiency in Koppel Industrials deliveries to local
purchasers, - which should not have been the case if
Koppel Phil was operating as an independent entity
doing business for profit.
c. Koppel Industrial, charged Koppel Phil for costs of
operation and even the cable quotations it would send
this can only be comprehended by considering
plaintiff Koppel Phil as a subsidiary branch or agency
of the parent corp, in which case it would be an
understandable arrangement for the convenient
accounting purposes and easy determination of profits
and losses.
d. The delegation by Koppel Industrial to Koppel Phil,
fully empowering it to instruct the locl banks with
regard to the disposition if the drafts and documents
this delegation of power is indicative of the relations
between central and branch offices of the same
business enterprise, with the latter acting under the
instructions of the former.
e. The contracts involved were all perfected in the
Philippines the local purchasers had to wait for the
quotations from the American corporation. Under the
revenue law in force when the sales in question took
place, the merchants sales tax attached when the
perfection of the contract of sale took place in the
Philippines.
The SC cited many cases where in resort was had to the
doctrine of disregard of the corporate fiction
By most courts the entity is normally regarded but is
disregarded to prevent injustice, or the distortion or
hiding of the truth, or to let in a just defense. When
the corporation is a mere alter ego, or business
conduit of a person, it may be disregarded.
In Monongahela Co. vs. Pittsburg Co. The court said;
While we recognize the legal principle that a
corporation does not lose its entity by the ownership of
the bulk or even the whole of its stock, by another
corporation yet it is equally well settled courts will
look beyond the mere artificial personality which
incorporation confers, and if necessary to work out
equitable ends, will ignore corporate forms." Colonial
Trust Co. vs. Montello Brick Works,
"Where it appears that two business enterprises are
owned, conducted and controlled by the same parties,
both law and equity will, when necessary to protect
the rights of third persons, disregard the legal fiction
that two corporations are distinct entities, and treat
 them as identical." (Abney vs. Belmont Country Club
Properties, Inc., 279 Pac., 829.)
"* * * the legal fiction of distinct corporate existence
will be disregarded in a case where a corporation is so
organized and controlled and its affairs are so
conducted, as to make it merely an instrumentality or
adjunct of another corporation." (Hanter vs. Baker
Motor Vehicle Co., 190 Fed., 665.)
3. Yes. To allow the taxpayer to deny the tax liability on the
ground that the sales were made through another and distinct
corporation, as alleged broker, when we have seen that the
latter corporation is virtually owned by the former or are
practically one and the same, is to sanction a circumvention of
our tax laws, and permit a tax evasion.
DISPOSITIVE PORTION:
Wherefore, the judgment appealed from is affirmed, with
costs of both instances against appellant.
So ordered.