While the law allows us to reap
the benefits of doing business as a corporation, the corporation must exist for
a legitimate purpose and operation, other than the purpose of simply avoiding
paying what would otherwise be proper taxes due it.
In the case discussed below Norton
and Harrison Company was made liable for taxes it claimed were due to Jackbilt,
another corporation all of whose stocks Norton and Harrison purchased during
the period subject of assessment. In so holding, the Court explained:
xxx
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 (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June 30, 1961).
However,
in the case at bar, we find sufficient grounds to support the theory that the
separate identities of 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. In the case of Liddell & Co. Inc. v. Coll. of Int.
Rev., supra, it was held:
There
are quite a series of conspicuous circumstances that militates against the separate
and distinct personality of Liddell Motors Inc., from Liddell & Co. We
notice that the bulk of the business of Liddell & Co. was channel Red
through Liddell Motors, Inc. On the other hand, Liddell Motors Inc. pursued no
activities except to secure cars, trucks, and spare parts from Liddell &
Co., Inc. and then sell them to the general public. These sales of vehicles by
Liddell & Co, to Liddell Motors. Inc. for the most part were shown to have
taken place on the same day that Liddell Motors, Inc. sold such vehicles to the
public. We may even say that the cars and trucks merely touched the hands of
Liddell Motors, Inc. as a matter of formality.
x x x
Accordingly,
the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations
owned and controlled by Frank Liddell directly or indirectly is not by itself
sufficient to justify the disregard of the separate corporate identity of one
from the other. There is however, in this instant case, a peculiar sequence of
the organization and activities of Liddell Motors, Inc.
As opined in the case of Gregory v.
Helvering "the legal right of a tax payer to decrease the amount of
what otherwise would be his taxes, or altogether avoid them, by means which the
law permits, cannot be doubted". But as held in another
case, "where a
corporation is a dummy, is unreal or a sham and serves no business purpose and
is intended only as a blind, the corporate form may be ignored for the law
cannot countenance a form that is bald and a mischievous fictions".
... a taxpayer may gain advantage of doing
business thru a corporation if he pleases, but the revenue officers in proper
cases, may disregard the separate corporate entity where it serves but as a
shield for tax evasion and treat the person who actually may take
benefits of the transactions as the person accordingly taxable.
... to
allow a taxpayer to deny tax liability on the ground that the sales were made
through another and distinct corporation when it is proved that the latter is
virtually owned by the former or that they are practically one and the same is
to sanction a circumvention of our tax laws. (and cases cited therein.)
In the
case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan.
28, 1961, this Court made a similar ruling where the circumstances of unity of
corporate identities have been shown and which are identical to those obtaining
in the case under consideration. Therein, this Court said:
We
are, however, inclined to agree with the court below that SM was actually owned
and controlled by petitioner as to make it a mere subsidiary or branch of the
latter created for the purpose of selling the vehicles at retail (here concrete
blocks) ... .
It may not be amiss to state in this connection,
the advantages to Norton in maintaining a semblance of separate entities. If the income of Norton 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. Based upon the 1954-1955 income tax return of Norton and Jackbilt (Exhs. 7
& 8), and assuming that both of them are operating on the same fiscal basis
and their returns are accurate, we would have the following result: Jackbilt
declared a taxable net income of P161,202.31 in which the income tax due was
computed at P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net
income of P120,101.59, on which the income tax due was computed at P25,628.00.
The total of these liabilities is P50,764.84. On the other hand, if the net
taxable earnings of both corporations are combined, during the same taxable
year, the tax due on their total which is P281,303.90 would be P70,764.00. So
that, even on the question of income tax alone, it would be to the advantages
of Norton that the corporations should be regarded as separate entities.
xxx
xxx
CIR
vs. Norton and Harrison Company
Read
the case here.
