REPUBLIC OF THE PHILIPPINES vs.
HEIRS OF CESAR payment of surcharge, interest, and penalty for late
JALANDONI, ET AL.
FACTS:
Isabel Ledesma died intestate on June 23, 1948 leaving real
properties situated in the provinces of Negros Occidental
and Rizal and in the cities of Manila and Baguio, and
personal properties consisting of shares of stock in various
domestic corporations. She left as heirs her husband
Bernardino Jalandoni and three children, namely, Cesar,
Angeles and Delfin, all surnamed Jalandoni.
On November 19, 1948, Cesar Jalandoni, one of the heirs,
filed an estate and inheritance tax return reporting the
following: (1) that the real and personal properties owned
by the deceased and her surviving husband had a total
market value of P1,324,555.80; (2) that after deducting
therefrom the conjugal share of her husband and some
expenses the net estate subject to estate tax was
P28,148.04; and (3) that the amount subject to inheritance
tax was P542,225.83. This return also shows that no
testamentary or intestate proceedings were instituted.
On the basis of this return the Bureau of Internal Revenue
made an assessment on November 20, 1948 calling for the
payment of the amounts of P31,435.95 and P58,863.52 as
estate and inheritance taxes, respectively, stating therein
that the assessment was "to be considered partial pending
investigation of the return." These sums were paid by Cesar
Jalandoni.
After a preliminary investigation was made of the
properties reported in the abovementioned return, a
second assessment was made on January 27, 1953 by the
Bureau of Internal Revenue showing that there was due
from the estate the amounts of P5,539.67 and P9,899.37 as
deficiency estate and inheritance taxes, respectively, for
which reason a demand was made on Bernardino Jalandoni
stating therein that the same was still "to be considered
partial pending further investigation of the return," which
amounts were paid by Bernardino Jalandoni on February
28, 1953.
True to the foregoing reservation, the Bureau of Internal
Revenue conducted another investigation and this time it
found (1) that the market value of the lands reported in the
return filed by Cesar Jalandoni was underdeclared in the
amount of P365,149.50; (2) that seven lots which were
registered in the Talisay-Silay cadastre of Negros
Occidental as belonging to the deceased, including their
improvements, were omitted from the return the same
having a market value of P100,200.00; and (3) the shares of
stock owned by the deceased in the Victorias Milling
Company, Hawaiian-Philippine Company and Central
Azucarera de la Carlota, though included in the return, were
however underdeclared in the amount of P16,355.36, and
on the basis of these findings a third assessment was made
against the estate on May 9, 1956 wherein the heirs were
required to pay the amounts of P29,995.30 and P49,842.05
as deficiency estate and inheritance taxes, respectively,
including accrued interests, with the warning that failure on
their part to pay the same would subject them to the
payment of the tax.
In answer to this third assessment after notice was served
on the administrator of the estate, Bernardino Jalandoni,
Lorenzo J. Teves, in his capacity as counsel of the heirs of
the deceased, wrote a letter to the Collector of Internal
Revenue setting up the defense of prescription in the sense
that the deficiency in the estate and inheritance taxes
payment of which was required therein can no longer be
collected since more than five years had already elapsed
from the filing of the return invoking in his favor Section
331 of the National Internal Revenue Code. To this defense,
the Collector retorted claiming that the stand of counsel
cannot be entertained for the reason that, it appearing that
the estate and inheritance tax return which was filed by the
administrator or by the heirs contained omissions which
amount to fraud indicative of an intention to evade payment
of the proper tax due the government, the taxes then being
collected could still be demanded within ten years from the
discovery of the falsity or omission pursuant to Section
332(a) of said Code, which period had not yet expired, and
as a consequence, the assessment notice was reiterated
with the request that the deficiency estate and inheritance
taxes therein demanded be settled as soon as possible. And
noting that the 30-day period within which the heirs could
appeal the Collector's assessment to the Court of Tax
Appeals had already elapsed, while on the other hand they
indicated their unwillingness to settle the claim, the
Collector of Internal Revenue filed the present case before
the Court of First Instance of Manila pressing the collection
of the deficiency estate and inheritance taxes assessed
against the heirs of the deceased Isabel Ledesma Jalandoni.
It is claimed that the lower court erred in finding that the
return submitted by Cesar Jalandoni in behalf of the heirs
concerning the estate of the deceased for the purpose of the
payment of the required estate and inheritance taxes is false
and fraudulent there being no evidence on record showing
that said return was filed in bad faith for which reason fraud
cannot be imputed to appellants.
The difference between the amounts appearing in the
returns filed and the undeclared properties of the estate of
the deceased is a substantial understatement of the true
value of the estate in question. The court is of the opinion,
and so holds that the tax returns filed were false. A
substantial understatement of stocks and the omission of
seven (7) parcels of land belonging to the estate of the
deceased, makes it impossible for the court to believe that
the omission or understatements were due to inadvertence,
negligence, or honest statement of error. Circumstances
such as this are competent to base a finding of willful
intent.1awphîl.nèt
And to bolster up this finding appellee submits the
following facts which, it contends, appear in the record: (1)
among the real properties belonging to the deceased five
lots in Negros Occidental, including improvements thereon,
with a market value of P58,570.00 were not included in the
return filed by a representative of appellants; (2) the value
of the sugar and rice lands that were reported in the return
were underdeclared in the amount of P365,149.50; and (3)
the market value of the shares of stock owned by the
deceased in the Victorias Milling Company, Hawaiian-
Philippine Company and the Central Azucarera de la Carlota
was underdeclared in the amount of P16,355.36. In other
words, it is claimed that a total amount of P440,074.86
which constitutes real asset of the estate has been
deliberately omitted from the return thereby evincing an
intention to evade the payment of the correct amount of tax
due to the government.
ISSUE:
Whether or not the heirs of the deceased have committed
any act indicative of an intention to evade the payment of
the inheritance or estate taxes due the government.
RULING:
We are of the opinion that this finding is neither fair nor
reasonable. To begin with, it should be here noted that
when this case was pending hearing on the merits before
the lower court, the latter, upon request of appellants,
ordered the Collector of Internal Revenue to verify the
allegation that there were seven lots in Negros Occidental
which were claimed not to have been included in the return
filed by Cesar Jalandoni, and to this effect the Collector
designated Examiner Genaro Butas to conduct the
examination. Examiner Butas, after conducting the
examination, submitted his report.
From the report of Examiner Butas the following may be
gleaned: that of the seven lots alleged to have been excluded
from the return, three were actually included, with the
particularity that they were the most valuable, to wit: Lot
493 with a market value of P21,630.00; Lot 521 with a
market value of P30,000.00; and Lot 229 with a market
value of P12,000.00, while another lot was not also included
because it belonged to Delfin Jalandoni, or Lot 228 which,
including improvements, has a market value of P16,900.00.
Hence, from the foregoing we find that the aggregate value
of the aforesaid four lots is P86,610.00 which, if deducted
from the total value of the seven lots amounting to
P90,110.00, gives a balance of P3,500.00 as the value of the
three remaining lots. These three lots being conjugal
property, one-half thereof belonging to the deceased's
spouse should still be deducted, thus leaving a small balance
of P1,750.00. If to this we add that, as the record shows,
these three lots were already declared in the return
submitted by Bernardino Jalandoni as part of his property
and his wife for purposes of income tax, there is reason to
believe that their omission from the return submitted by
Cesar Jalandoni was merely due to an honest mistake or
inadvertence as properly explained by appellants. We can
hardly dispute this conclusion as it would be stretching too
much the imagination if we would find that, because of such
inadvertence, which appears to be inconsequential, the
heirs of the deceased deliberately omitted from the return
the three lots with the only purpose of defrauding the
government after declaring therein as asset of the estate
property worth P1,324,555.80.
The same thing may be said with regard to the alleged
undervaluation of certain sugar and rice lands reported by
Cesar Jalandoni which appellee fixes at P365,149.50, for the
same can at most be considered as the result of an honest
difference of opinion and not necessarily an intention to
commit fraud. It should be stated that in the estate and
inheritance tax returns submitted by Cesar Jalandoni on
November 19, 1948 he reported said lands as belonging to
the deceased with a statement of what in his opinion
represent their reasonable actual value but which
happened not to tally with the valuation made by the
Collector of Internal Revenue. Certainly if there is any
mistake in the valuation made by Jalandoni the same can
only be considered as honest mistake, or one based on
excusable inadvertence, he being not an expert in
appraising real estate. The deficiency assessment,
moreover, was made by the Collector of Internal Revenue
more than five years from the filing of the return, and
experience shows that such an intervening period is
sufficiently long to, warrant an increase in value of real
estate which is precisely what was found by the Collector of
Internal Revenue with regard to the lands in question. It is
certainly an error to impute fraud based on an honest
difference of opinion.
Finally, we find unreasonable to impute with regard to the
appraisal made by appellants of the shares of stock of the
deceased in Victorias Milling Company, Hawaiian-
Philippine Company and Central Azucarera de la Carlota,
simply because Cesar Jalandoni placed in his return an
aggregate market value of P95,480.00, instead of
mentioning the book value declared by said corporations in
the returns filed by them with the Bureau of Internal
Revenue. The fact that the value given in the returns did not
tally with the book value appearing in the corporate books
is not in itself indicative of fraud especially when we take
into consideration the circumstance that said book value
only became known several months after the death of the
deceased. Moreover, it is a known fact that stock securities
frequently fluctuate in value and a mere difference of
opinion in relation thereto cannot serve as proper basis for
assessing an intention to defraud the government.
Having reached the conclusion that the heirs of the
deceased have not committed any act indicative of an
intention to evade the payment of the inheritance or estate
taxes due the government, as evidenced by their willingness
in the past to pay all the taxes properly assessed against
them, it is evident that the instant claim of appellee has
already prescribed under Section 331 of the National
Internal Revenue Code. And with this conclusion, a
discussion of the other errors assigned by appellants would
seem to be unnecessary.
YUTIVO SONS HARDWARE COMPANY vs. COURT OF TAX
APPEALS and COLLECTOR OF INTERNAL REVENUE
FACTS:
Yutivo Sons Hardware Co. (hereafter referred to as Yutivo)
is a domestic corporation, organized under the laws of the
Philippines, with principal office at 404 Dasmariñas St.,
Manila. Incorporated in 1916, it was engaged, prior to the
last world war, in the importation and sale of hardware
supplies and equipment. After the liberation, it resumed its
business and until June of 1946 bought a number of cars and
trucks from General Motors Overseas Corporation
(hereafter referred to as GM for short), an American
corporation licensed to do business in the Philippines. As
importer, GM paid sales tax prescribed by sections 184, 185
and 186 of the Tax Code on the basis of its selling price to
Yutivo. Said tax being collected only once on original sales,
Yutivo paid no further sales tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter
referred to as SM) was organized to engage in the business
of selling cars, trucks and spare parts. At the time of its
incorporation 2,500 shares worth P250,000 appear to have
been subscribed into equal proportions by Yu Khe Thai, Yu
Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip.
The first three named subscribers are brothers, being sons
of Yu Tiong Yee, one of Yutivo's founders. The latter two are
respectively sons of Yu Tiong Sin and Albino Sycip, who are
among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of
GM from the Philippines in the middle of 1947, the cars and
tracks purchased by Yutivo from GM were sold by Yutivo to
SM which, in turn, sold them to the public in the Visayas and
Mindanao.
When GM decided to withdraw from the Philippines in the
middle of 1947, the U.S. manufacturer of GM cars and trucks
appointed Yutivo as importer for the Visayas and Mindanao,
and Yutivo continued its previous arrangement of selling
exclusively to SM. In the same way that GM used to pay sales
taxes based on its sales to Yutivo, the latter, as importer,
paid sales tax prescribed on the basis of its selling price to
SM, and since such sales tax, as already stated, is collected
only once on original sales, SM paid no sales tax on its sales
to the public.
On November 7, 1950, after several months of investigation
by revenue officers started in July, 1948, the Collector of
Internal Revenue made an assessment upon Yutivo and
demanded from the latter P1,804,769.85 as deficiency sales
tax plus surcharge covering the period from the third
quarter of 1947 to the fourth quarter of 1949; or from July
1, 1947 to December 31, 1949, claiming that the taxable
sales were the retail sales by SM to the public and not the
sales at wholesale made by, Yutivo to the latter inasmuch as
SM and Yutivo were one and the same corporation, the
former being the subsidiary of the latter.
The assessment was disputed by the petitioner, and a
reinvestigation of the case having been made by the agents
of the Bureau of Internal Revenue, the respondent Collector
in his letter dated November 15, 1952 countermanded his
demand for sales tax deficiency on the ground that "after
several investigations conducted into the matter no
sufficient evidence could be gathered to sustain the
assessment of this Office based on the theory that Southern
Motors is a mere instrumentality or subsidiary of Yutivo."
A Second assessment was contested by the petitioner
Yutivo before the Court of Tax Appeals, alleging that there
is no valid ground to disregard the corporate personality of
SM and to hold that it is an adjunct of petitioner Yutivo; (2)
that assuming the separate personality of SM may be
disregarded, the sales tax already paid by Yutivo should
first be deducted from the selling price of SM in computing
the sales tax due on each vehicle; and (3) that the surcharge
has been erroneously imposed by respondent.
ISSUE:
Whether or not Yutivo should be held liable to pay for the
tax deficiencies.
RULING:
It is an elementary and fundamental principle of
corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporation
petitions to which it may be connected. However, "when the
notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime," the law will
regard the corporation as an association of persons, or in
the case of two corporations merge them into one.
We are inclined to rule that the Court of Tax Appeals was
not justified in finding that SM was organized for no other
purpose than to defraud the Government of its lawful
revenues. In the first place, this corporation was organized
in June, 1946 when it could not have caused Yutivo any tax
savings. From that date up to June 30, 1947, or a period of
more than one year, GM was the importer of the cars and
trucks sold to Yutivo, which, in turn resold them to SM.
During that period, it is not disputed that GM as importer,
was the one solely liable for sales taxes. Neither Yutivo or
SM was subject to the sales taxes on their sales of cars and
trucks. The sales tax liability of Yutivo did not arise until July
1, 1947 when it became the importer and simply continued
its practice of selling to SM. The decision, therefore, of the
Tax Court that SM was organized purposely as a tax evasion
device runs counter to the fact that there was no tax to
evade.
At this juncture, it should be stated that the intention to
minimize taxes, when used in the context of fraud, must be
proved to exist by clear and convincing evidence amounting
to more than mere preponderance, and cannot be justified
by a mere speculation. This is because fraud is never lightly
to be presumed.
SM was organized and it operated, under circumstance that
belied any intention to evade sales taxes. "Tax evasion" is a
term that connotes fraud thru the use of pretenses and
forbidden devices to lessen or defeat taxes. The
transactions between Yutivo and SM, however, have always
been in the open, embodied in private and public
documents, constantly subject to inspection by the tax
authorities. As a matter of fact, after Yutivo became the
importer of GM cars and trucks for Visayas and Mindanao,
it merely continued the method of distribution that it had
initiated long before GM withdrew from the Philippines.
Sections 184 to 186 of the said Code provides that the sales
tax shall be collected "once only on every original sale,
barter, exchange . . , to be paid by the manufacturer,
producer or importer." The use of the word "original" and
the express provision that the tax was collectible "once
only" evidently has made the provisions susceptible of
different interpretations. In this connection, it should be
stated that a taxpayer has the legal right to decrease the
amount of what otherwise would be his taxes or altogether
avoid them by means which the law permits.
The evidence for the Collector, in our opinion, falls short of
the standard of clear and convincing proof of fraud. As a
matter of fact, the respondent Collector himself showed a
great deal of doubt or hesitancy as to the existence of fraud.
He even doubted the validity of his first assessment dated
November 7, 1959. It must be remembered that the fraud
which respondent Collector imputed to Yutivo must be
related to its filing of sales tax returns of less taxes than
were legally due. The allegation of fraud, however, cannot
be sustained without the showing that Yutivo, in filing said
returns, did so fully knowing that the taxes called for
therein called for therein were less than what were legally
due. Considering that respondent Collector himself with the
aid of his legal staff, and after some two years of
investigation and duty of investigation and study concluded
in 1952 that Yutivo's sales tax returns were correct — only
to reverse himself after another two years — it would seem
harsh and unfair for him to say in 1954 that Yutivo fully
knew in October 1947 that its sales tax returns were
inaccurate.
On this point, one other consideration would show that the
intent to save taxes could not have existed in the minds of
the organizers of SM. The sales tax imposed, in theory and
in practice, is passed on to the vendee, and is usually billed
separately as such in the sales invoice. As pointed out by
petitioner Yutivo, had not SM handled the retail, the
additional tax that would have been payable by it, could
have been easily passed off to the consumer, especially
since the period covered by the assessment was a "seller's
market" due to the post-war scarcity up to late 1948, and
the imposition of controls in the late 1949.
We are, however, inclined to agree with the court below
that SM was actually owned and controlled by petitioner as
to make it a mere subsidiary or branch of the latter created
for the purpose of selling the vehicles at retail and
maintaining stores for spare parts as well as service repair
shops. It is not disputed that the petitioner, which is
engaged principally in hardware supplies and equipment, is
completely controlled by the Yutivo, Young or Yu family.
The founders of the corporation are closely related to each
other either by blood or affinity, and most of its
stockholders are members of the Yu (Yutivo or Young)
family. It is, likewise, admitted that SM was organized by the
leading stockholders of Yutivo headed by Yu Khe Thai.
The shareholders in SM are mere nominal stockholders
holding the shares for and in behalf of Yutivo, so even
conceding that the original subscribers were stockholders
bona fide Yutivo was at all times in control of the majority
of the stock of SM and that the latter was a mere subsidiary
of the former.
True, petitioner and other recorded stockholders
transferred their shareholdings, but the transfers were
made to their immediate relatives, either to their respective
spouses and children or sometimes brothers or sisters.
Yutivo's shares in SM were transferred to immediate
relatives of persons who constituted its controlling
stockholders, directors and officers.
SM is under the management and control of Yutivo by virtue
of a management contract entered into between the two
parties. In fact, the controlling majority of the Board of
Directors of Yutivo is also the controlling majority of the
Board of Directors of SM. At the same time the principal
officers of both corporations are identical. In addition both
corporations have a common comptroller in the person of
Simeon Sy, who is a brother-in-law of Yutivo's president, Yu
Khe Thai. There is therefore no doubt that by virtue of such
control, the business, financial and management policies of
both corporations could be directed towards common ends.
Another aspect relative to Yutivo's control over SM
operations relates to its cash transactions. All cash assets of
SM were handled by Yutivo and all cash transactions of SM
were actually maintained thru Yutivo. Any and all receipts
of cash by SM including its branches were transmitted or
transferred immediately and directly to Yutivo in Manila
upon receipt thereof. Likewise, all expenses, purchases or
other obligations incurred by SM are referred to Yutivo
which in turn prepares the corresponding disbursement
vouchers and payments in relation there, the payment
being made out of the cash deposits of SM with Yutivo, if
any, or in the absence thereof which occurs generally, a
corresponding charge is made against the account of SM in
Yutivo's books.
All the above plainly show that cash or funds of SM,
including those of its branches which are directly remitted
to Yutivo, are placed in the custody and control of Yutivo,
resources and subject to withdrawal only by Yutivo. SM's
being under Yutivo's control, the former's operations and
existence became dependent upon the latter.
Consideration of various other circumstances, especially
when taken together, indicates that Yutivo treated SM
merely as its department or adjunct. For one thing, the
accounting system maintained by Yutivo shows that it
maintained a high degree of control over SM accounts. All
transactions between Yutivo and SM are recorded and
effected by mere debit or credit entries against the
reciprocal account maintained in their respective books of
accounts and indicate the dependency of SM as branch upon
Yutivo.
importer, of the sales tax was enough as in the case of GM
Consequently, in filing its return on the basis of its sales to
SM and not on those by the latter to the public, it cannot be
said that Yutivo deliberately made a false return for the
purpose of defrauding the government of its revenues
which will justify the imposition of the surcharge penalty.

Southern Motors being but a mere instrumentality, or

adjunct of Yutivo, the Court of Tax Appeals correctly
disregarded the technical defense of separate corporate
entity in order to arrive at the true tax liability of Yutivo.

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

Petitioner argues that the original assessment of November

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

It should here also be stated that the assessment in question

was consistently protested by petitioner, making several
requests for reinvestigation thereof. Under the
circumstances, petitioner may be considered to have
waived the defense of prescription.

We find merit, however, in petitioner's contention that the

Court of Tax Appeals erred in the imposition of the 5% fraud
surcharge. As already shown in the early part of this
decision, no element of fraud is present.

Pursuant to Section 183 of the National Internal Revenue

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

When GM was the importer and Yutivo, the wholesaler, of

the cars and trucks, the sales tax was paid only once and on
the original sales by the former and neither the latter nor
SM paid taxes on their subsequent sales. Yutivo might have,
therefore, honestly believed that the payment by it, as
COMMISSIONER OF INTERNAL REVENUE vs. NORTON
and HARRISON COMPANY
FACTS:
Norton and Harrison is a corporation organized in 1911, (1)
to buy and sell at wholesale and retail, all kinds of goods,
wares, and merchandise; (2) to act as agents of
manufacturers in the United States and foreign countries;
and (3) to carry on and conduct a general wholesale and
retail mercantile establishment in the Philippines. Jackbilt
is, likewise, a corporation organized on February 16, 1948
primarily for the purpose of making, producing and
manufacturing concrete blocks. Under date of July 27, 1948.
Norton and Jackbilt entered into an agreement whereby
Norton was made the sole and exclusive distributor of
concrete blocks manufactured by Jackbilt. Pursuant to this
agreement, whenever an order for concrete blocks was
received by the Norton & Harrison Co. from a customer, the
order was transmitted to Jackbilt which delivered the
merchandise direct to the customer. Payment for the goods
is, however, made to Norton, which in turn pays Jackbilt the
amount charged the customer less a certain amount, as its
compensation or profit. To exemplify the sales procedures
adopted by the Norton and Jackbilt, the following may be
cited. In the case of the sale of 420 pieces of concrete blocks
to the American Builders on April 1, 1952, the purchaser
paid to Norton the sum of P189.00 the purchase price. Out
of this amount Norton paid Jackbilt P168.00, the difference
obviously being its compensation. As per records of Jackbilt,
the transaction was considered a sale to Norton. It was
under this procedure that the sale of concrete blocks
manufactured by Jackbilt was conducted until May 1, 1953,
when the agency agreement was terminated and a
management agreement between the parties was entered
into. The management agreement provided that Norton
would sell concrete blocks for Jackbilt, for a fixed monthly
fee of P2,000.00, which was later increased to P5,000.00.
During the existence of the distribution or agency
agreement, or on June 10, 1949, Norton & Harrison
acquired by purchase all the outstanding shares of stock of
Jackbilt. Apparently, due to this transaction, the
Commissioner of Internal Revenue, after conducting an
investigation, assessed the respondent Norton & Harrison
for deficiency sales tax and surcharges in the amount of
P32,662.90, making as basis thereof the sales of Norton to
the Public. In other words, the Commissioner considered
the sale of Norton to the public as the original sale and not
the transaction from Jackbilt. The period covered by the
assessment was from July 1, 1949 to May 31, 1953. As
Norton and Harrison did not conform with the assessment,
the matter was brought to the Court of Tax Appeals.
The Commissioner of Internal Revenue contends that since
Jackbilt was owned and controlled by Norton & Harrison,
the corporate personality of the former (Jackbilt) should be
disregarded for sales tax purposes, and the sale of Jackbilt
blocks by petitioner to the public must be considered as
the original sales from which the sales tax should be
computed. The Norton & Harrison Company contended
otherwise — that is, the transaction subject to tax is the sale
from Jackbilt to Norton.
ISSUE/S:
(1) whether the acquisition of all the stocks of the
Jackbilt by the Norton & Harrison Co., merged the
two corporations into a single corporation; (2)
whether the basis of the computation of the
deficiency sales tax should be the sale of the blocks
to the public and not to Norton.
RULING:
It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily
breed an identity of corporate interest between the two
companies and be considered as a sufficient ground for
disregarding the distinct personalities. owever, in the case
at bar, we find sufficient grounds to support the theory that
the separate identities of the two companies should be
disregarded. Among these circumstances, which we find not
successfully refuted by appellee Norton are: (a) Norton and
Harrison owned all the outstanding stocks of Jackbilt; of the
15,000 authorized shares of Jackbilt on March 31, 1958,
14,993 shares belonged to Norton and Harrison and one
each to seven others; (b) Norton constituted Jackbilt's
board of directors in such a way as to enable it to actually
direct and manage the other's affairs by making the same
officers of the board for both companies. For instance,
James E. Norton is the President, Treasurer, Director and
Stockholder of Norton. He also occupies the same positions
in Jackbilt corporation, the only change being, in the
Jackbilt, he is merely a nominal stockholder. The same is
true with Mr. Jordan, F. M. Domingo, Mr. Mantaring, Gilbert
Golden and Gerardo Garcia, while they are merely
employees of the North they are Directors and nominal
stockholders of the Jackbilt (c) Norton financed the
operations of the Jackbilt, and this is shown by the fact that
the loans obtained from the RFC and Bank of America were
used in the expansion program of Jackbilt, to pay advances
for the purchase of equipment, materials rations and
salaries of employees of Jackbilt and other sundry expenses.
There was no limit to the advances given to Jackbilt so much
so that as of May 31, 1956, the unpaid advances amounted
to P757,652.45, which were not paid in cash by Jackbilt, but
was offset by shares of stock issued to Norton, the absolute
and sole owner of Jackbilt; (d) Norton treats Jackbilt
employees as its own. Evidence shows that Norton paid the
salaries of Jackbilt employees and gave the same privileges
as Norton employees, an indication that Jackbilt employees
were also Norton's employees. Furthermore service
rendered in any one of the two companies were taken into
account for purposes of promotion; (e) Compensation given
to board members of Jackbilt, indicate that Jackbilt is merely
a department of Norton. The income tax return of Norton
for 1954 shows that as President and Treasurer of Norton
and Jackbilt, he received from Norton P56,929.95, but
received from Jackbilt the measly amount of P150.00, a
circumstance which points out that remuneration of
purported officials of Jackbilt are deemed included in the
salaries they received from Norton. The same is true in the
case of Eduardo Garcia, an employee of Norton but a
member of the Board of Jackbilt. His Income tax return for
1956 reveals that he received from Norton in salaries and
bonuses P4,220.00, but received from Jackbilt, by way of
entertainment, representation, travelling and
transportation allowances P3,000.00. However, in the
withholding statement (Exh. 28-A), it was shown that the
total of P4,200.00 and P3,000.00 (P7,220.00) was received
by Garcia from Norton, thus portraying the oneness of the
two companies. The Income Tax Returns of Albert Golden
and Dioscoro Ramos both employees of Norton but board
members of Jackbilt, also disclose the game method of
payment of compensation and allowances. The offices of
Norton and Jackbilt are located in the same compound.
Payments were effected by Norton of accounts for Jackbilt
and vice versa. Payments were also made to Norton of
accounts due or payable to Jackbilt and vice versa.

Norton and Harrison, while not denying the presence of the

set up stated above, tried to explain that the control over the
affairs of Jackbilt was not made in order to evade payment
of taxes; that the loans obtained by it which were given to
Jackbilt, were necessary for the expansion of its business in
the manufacture of concrete blocks, which would ultimately
benefit both corporations; that the transactions and
practices just mentioned, are not unusual and
extraordinary, but pursued in the regular course of business
and trade; that there could be no confusion in the present
set up of the two corporations, because they have separate
Boards, their cash assets are entirely and strictly separate;
cashiers and official receipts and bank accounts are distinct
and different; they have separate income tax returns,
separate balance sheets and profit and loss statements.
These explanations notwithstanding an over-all appraisal
of the circumstances presented by the facts of the case,
yields to the conclusion that the Jackbilt is merely an
adjunct, business conduit or alter ego, of Norton and
Harrison and that the fiction of corporate entities, separate
and distinct from each, should be disregarded. This is a case
where the doctrine of piercing the veil of corporate fiction,
should be made to apply.

It may not be amiss to state in this connection, the

advantages to Norton in maintaining a semblance of
separate entities. If the income of Norton should be
considered separate from the income of Jackbilt, then each
would declare such earning separately for income tax
purposes and thus pay lesser income tax. The combined
taxable Norton-Jackbilt income would subject Norton to a
higher tax.
PHILIPPINE ACETYLENE CO., INC. vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF
TAX APPEALS
FACTS:
The petitioner is a corporation engaged in the manufacture
and sale of oxygen and acetylene gases. During the period
from June 2, 1953 to June 30, 1958, it made various sales of
its products to the National Power Corporation, an agency
of the Philippine Government, and to the Voice of America
an agency of the United States Government. The sales to the
NPC amounted to P145,866.70, while those to the VOA
amounted to P1,683, on account of which the respondent
Commission of Internal Revenue assessed against, and
demanded from, the petitioner the payment of P12,910.60
as deficiency sales tax and surcharge. The petitioner denied
liability for the payment of the tax on the ground that both
the NPC and the VOA are exempt from taxation. It asked for
a reconsideration of the assessment and, failing to secure
one, appealed to the Court of Tax Appeals.
The court ruled that the tax on the sale of articles or goods
in section 186 of the Code is a tax on the manufacturer and
not on the buyer with the result that the "petitioner
Philippine Acetylene Company, the manufacturer or
producer of oxygen and acetylene gases sold to the National
Power Corporation, cannot claim exemption from the
payment of sales tax simply because its buyer — the
National Power Corporation — is exempt from the payment
of all taxes." With respect to the sales made to the VOA, the
court held that goods purchased by the American
Government or its agencies from manufacturers or
producers are exempt from the payment of the sales tax
under the agreement between the Government of the
Philippines and that of the United States, provided the
purchases are supported by certificates of exemption, and
since purchases amounting to only P558, out of a total of
P1,683, were not covered by certificates of exemption, only
the sales in the sum of P558 were subject to the payment of
tax. Accordingly, the assessment was revised and the
petitioner's liability was reduced from P12,910.60, as
assessed by the respondent commission, to P12,812.16.
The petitioner appealed to this Court. Its position is that it
is not liable for the payment of tax on the sales it made to
the NPC and the VOA because both entities are exempt from
taxation.
ISSUE:
Is Philippine Acetylene Co. liable for tax?
RULING:
The NPC enjoys tax exemption by virtue of an act of
Congress. It is contended that the immunity thus given to
the NPC would be impaired by the imposition of a tax on
sales made to it because while the tax is paid by the
manufacturer or producer, the tax is ultimately shifted by
the latter to the former. The petitioner invokes in support
of its position a 1954 opinion of the Secretary of Justice
which ruled that the NPC is exempt from the payment of all
taxes "whether direct or indirect."
We begin with an analysis of the nature of the percentage
(sales) tax imposed by section 186 of the Code. Is it a tax on
the producer or on the purchaser? Statutes of the type
under consideration, which impose a tax on sales, have been
described as "act[s] with schizophrenic symptoms," as they
apparently have two faces — one that of a vendor tax, the
other, a vendee tax. Fortunately for us the provisions of the
Code throw some light on the problem. The Code states that
the sales tax "shall be paid by the manufacturer or
producer," ho must "make a true and complete return of the
amount of his, her or its gross monthly sales, receipts or
earnings or gross value of output actually removed from the
factory or mill warehouse and within twenty days after the
end of each month, pay the tax due thereon."
But it is argued that a sales tax is ultimately passed on to the
purchaser, and that, so far as the purchaser is an entity like
the NPC which is exempt from the payment of "all taxes,
except real property tax," the tax cannot be collected from
sales.
It may indeed be that the economic burden of the tax finally
falls on the purchaser; when it does the tax becomes a part
of the price which the purchaser must pay. It does not
matter that an additional amount is billed as tax to the
purchaser. The method of listing the price and the tax
separately and defining taxable gross receipts as the
amount received less the amount of the tax added, merely
avoids payment by the seller of a tax on the amount of the
tax. The effect is still the same, namely, that the purchaser
does not pay the tax. He pays or may pay the seller more for
the goods because of the seller's obligation, but that is all
and the amount added because of the tax is paid to get the
goods and for nothing else.
But the tax burden may not even be shifted to the purchaser
at all. A decision to absorb the burden of the tax is largely a
matter of economics. Then it can no longer be contended
that a sales tax is a tax on the purchaser.
We therefore hold that the tax imposed by section 186 of
the National Internal Revenue Code is a tax on the
manufacturer or producer and not a tax on the purchaser
except probably in a very remote and inconsequential
sense. Accordingly its levy on the sales made to tax-exempt
entities like the NPC is permissible.
This conclusion should dispose of the same issue with
respect to sales made to the VOA, except that a claim is here
made that the exemption of such sales from taxation rests
on stronger grounds. Even the Court of Tax Appeals appears
to share this view as is evident from the following portion
of its decision:
 With regard to petitioner's sales to the Voice of
America, it appears that the petitioner and the
respondent are in agreement that the Voice of
America is an agency of the United States
Government and as such, all goods purchased
locally by it directly from manufacturers or
producers are exempt from the payment of the
sales tax under the provisions of the agreement
between the Government of the Philippines and the
Government of the United States, (See
Commonwealth Act No. 733) provided such
purchases are supported by serially numbered
Certificates of Tax Exemption issued by the
vendee-agency, as required by General Circular No.
V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies

directly from manufacturers, producers or
importers shall be exempt from the sales tax.

It was issued purportedly to implement the Agreement

between the Republic of the Philippines and the United
States of America Concerning Military Bases, but we find
nothing in the language of the Agreement to warrant the
general exemption granted by that circular.

Only sales made "for exclusive use in the construction,

maintenance, operation or defense of the bases," in a word,
only sales to the quartermaster, are exempt under article V
from taxation. Sales of goods to any other party even if it be
an agency of the United States, such as the VOA, or even to
the quartermaster but for a different purpose, are not free
from the payment of the tax.
COMMISSIONER OF INTERNAL REVENUE vs. PILIPINAS
SHELL PETROLEUM CORPORATION
FACTS:
For resolution are the Motion for Reconsideration filed by
Pilipinas Shell Petroleum Corporation (respondent). In our
Decision promulgated on April 25, 2012, we ruled that the
Court of Tax Appeals (CTA) erred in granting respondent's
claim for tax refund because the latter failed to establish a
tax exemption in its favor under Section 135(a) of the
National Internal Revenue Code of 1997 (NIRC).
Respondent argues that a plain reading of Section 135 of the
NIRC reveals that it is the petroleum products sold to
international carriers which are exempt from excise tax for
which reason no excise taxes are deemed to have been due
in the first place. It points out that excise tax being an
indirect tax, Section 135 in relation to Section 148 should be
interpreted as referring to a tax exemption from the point
of production and removal from the place of production
considering that it is only at that point that an excise tax is
imposed.
Respondent also contends that our ruling that Section 135
only prohibits local petroleum manufacturers like
respondent from shifting the burden of excise tax to
international carriers has adverse economic impact as it
severely curtails the domestic oil industry. Requiring local
petroleum manufacturers to absorb the tax burden in the
sale of its products to international carriers is contrary to
the State’s policy of "protecting gasoline dealers and
distributors from unfair and onerous trade conditions," and
places them at a competitive disadvantage since foreign oil
producers, particularly those whose governments with
which we have entered into bilateral service agreements,
are not subject to excise tax for the same transaction.
Respondent fears this could lead to cessation of supply of
petroleum products to international carriers, retrenchment
of employees of domestic manufacturers/producers to
prevent further losses, or worse, shutting down of their
production of jet A-1 fuel and aviation gas due to
unprofitability of sustaining operations. Under this
scenario, participation of Filipino capital, management and
labor in the domestic oil industry is effectively diminished.
Lastly, respondent asserts that the imposition by the
Philippine Government of excise tax on petroleum products
sold to international carriers is in violation of the Chicago
Convention on International Aviation ("Chicago
Convention") to which it is a signatory, as well as other
international agreements (the Republic of the Philippines’
air transport agreements with the United States of America,
Netherlands, Belgium and Japan).
ISSUE:
W/N manufacturers or producers of petroleum products
are exempt from the payment of excise tax on petroleum
sold to international carriers
RULING:
Under Section 129 of the NIRC, excise taxes are those
applied to goods manufactured or produced in the
Philippines for domestic sale or consumption or for any
other disposition and to things imported. Excise taxes as
used in our Tax Code fall under two types – (1) specific tax
which is based on weight or volume capacity and other
physical unit of measurement, and (2) ad valorem tax which
is based on selling price or other specified value of the
goods. Aviation fuel is subject to specific tax under Section
148 (g) which attaches to said product "as soon as they are
in existence as such."
That excise tax as presently understood is a tax on property
has no bearing at all on the issue of respondent’s
entitlement to refund. Nor does the nature of excise tax as
an indirect tax supports respondent’s postulation that the
tax exemption provided in Sec. 135 attaches to the
petroleum products themselves and consequently the
domestic petroleum manufacturer is not liable for the
payment of excise tax at the point of production. As already
discussed in our Decision, to which Justice Bersamin
concurs, "the accrual and payment of the excise tax on the
goods enumerated under Title VI of the NIRC prior to their
removal at the place of production are absolute and admit
of no exception." This also underscores the fact that the
exemption from payment of excise tax is conferred on
international carriers who purchased the petroleum
products of respondent.
On the basis of Philippine Acetylene, we held that a tax
exemption being enjoyed by the buyer cannot be the basis
of a claim for tax exemption by the manufacturer or seller
of the goods for any tax due to it as the manufacturer or
seller. The excise tax imposed on petroleum products under
Section 148 is the direct liability of the manufacturer who
cannot thus invoke the excise tax exemption granted to its
buyers who are international carriers. And following our
pronouncement in Maceda v. Macarig, Jr. we further ruled
that Section 135(a) should be construed as prohibiting the
shifting of the burden of the excise tax to the international
carriers who buy petroleum products from the local
manufacturers. Said international carriers are thus allowed
to purchase the petroleum products without the excise tax
component which otherwise would have been added to the
cost or price fixed by the local manufacturers or
distributors/sellers.
Section 135(a) of the NIRC and earlier amendments to the
Tax Code represent our Governments’ compliance with the
Chicago Convention. Indeed, the avowed purpose of a tax
exemption is always "some public benefit or interest, which
the law-making body considers sufficient to offset the
monetary loss entailed in the grant of the exemption." The
exemption from excise tax of aviation fuel purchased by
international carriers for consumption outside the
Philippines fulfills a treaty obligation pursuant to which our
Government supports the promotion and expansion of
international travel through avoidance of multiple taxation
and ensuring the viability and safety of international air
travel. In recent years, developing economies such as ours
focused more serious attention to significant gains for
business and tourism sectors as well. Even without such
recent incidental benefit, States had long accepted the need
for international cooperation in maintaining a capital
intensive, labor intensive and fuel intensive airline industry,
and recognized the major role of international air transport
in the development of international trade and travel.
We maintain that Section 135 (a), in fulfillment of
international agreement and practice to exempt aviation
fuel from excise tax and other impositions, prohibits the
passing of the excise tax to international carriers who buys
petroleum products from local manufacturers/sellers such
as respondent.
However, we agree that there is a need to reexamine
the effect of denying the domestic
manufacturers/sellers’ claim for refund of the excise
taxes they already paid on petroleum products sold to
international carriers, and its serious implications on
our Government’s commitment to the goals and
objectives of the Chicago Convention.
burden of excise tax, or of petroleum products being
sold to said carriers by local manufacturers or sellers at
still high prices , the practice of "tankering" would not
be discouraged. This scenario does not augur well for
the Philippines' growing economy and the booming
tourism industry. Worse, our Government would be
risking retaliatory action under several bilateral
agreements with various countries. Evidently,
construction of the tax exemption provision in question
should give primary consideration to its broad
implications on our commitment under international
agreements.
In view of the foregoing reasons, we find merit in
respondent's motion for reconsideration. We therefore
hold that respondent, as the statutory taxpayer who is
directly liable to pay the excise tax on its petroleum
products, is entitled to a refund or credit of the excise
taxes it paid for petroleum products sold to
international carriers, the latter having been granted
exemption from the payment of said excise tax under
Sec. 135 (a) of the NIRC.

The Chicago Convention, which established the legal

framework for international civil aviation, did not deal
comprehensively with tax matters. Article 24 (a) of the
Convention simply provides that fuel and lubricating
oils on board an aircraft of a Contracting State, on
arrival in the territory of another Contracting State and
retained on board on leaving the territory of that State,
shall be exempt from customs duty, inspection fees or
similar national or local duties and charges.
Subsequently, the exemption of airlines from national
taxes and customs duties on spare parts and fuel has
become a standard element of bilateral air service
agreements (ASAs) between individual countries.

The importance of exemption from aviation fuel tax

was underscored in the following observation made by
a British author16 in a paper assessing the debate on
using tax to control aviation emissions and the
obstacles to introducing excise duty on aviation fuel,
thus:

Without any international agreement on taxing fuel, it

is highly likely that moves to impose duty on
international flights, either at a domestic or European
level, would encourage 'tankering': carriers filling their
aircraft as full as possible whenever they landed
outside the EU to avoid paying tax.1âwphi1 Clearly this
would be entirely counterproductive. Aircraft would be
travelling further than necessary to fill up in low-tax
jurisdictions; in addition they would be burning up
more fuel when carrying the extra weight of a full fuel
tank.

With the prospect of declining sales of aviation jet fuel

sales to international carriers on account of major
domestic oil companies' unwillingness to shoulder the